LIBRARY 

OF  THE 

UNIVERSITY  OF  CALIFORNIA. 

Class 


THE  METHODS  OF  TAXATION 


THE 

METHODS  OF  TAXATION 

COMPARED   WITH 

THE  ESTABLISHED  PRINCIPLES 
OF  JUSTICE 

BY 

DAVID  MACGKEGOB  MEANS 


NEW  YORK 

DODD,   MEAD  AND  COMPANY 
1911 


COPYRIGHT,  1909,  BY 
DODD,  MEAD  AND  COMPANY 

Published,  April,  1909 


THE  UNIVERSITY   PRESS,    CAMBRIDGE,    U.S.A. 


CONTENTS 

PAGE 

INTRODUCTION vii 

CHAPTER 

I    THE  THREE  METHODS  OP  TAXATION  ....  1 

II    NATURE  AND  LIMITATIONS  OP  PROPERTY      .    .  22 

III  UNEARNED  PROPERTY 55 

IV  PRACTICAL  APPLICATIONS  OP  THE  PROPORTION- 

ATE METHOD 89 

V   INCOME  TAXES 138 

VI   TAXES  ON  EXPENSE 172 

VII    TAXES  ON  TRANSFERS  OP  PROPERTY  AT  DEATH  211 

VIII    THE  DIFFUSION  OF  TAXES 236 

IX    THE  ECONOMIC  METHOD 275 

X  THE  COST  OP  COLLECTING  TAXES 330 

APPENDICES 

A.  EXTRACT  FROM  "TAXATION  OP  PERSONAL  PROP- 

ERTY"   363 

B.  TAXATION  IN  CHICAGO 370 

C.  TAXATION  OF  LAND  373 


226764 


INTRODUCTION 

So  many  theories  and  problems  are  comprised  under  the 
general  name  of  taxation  as  to  make  it  difficult  to  treat 
them  systematically.  But,  on  examination,  we  discover 
principles  that  may  be  made  to  bring  some  order  out  of 
the  apparent  chaos.  These  principles  may  properly  be 
called  the  methods  of  taxation;  although  the  term 
"  method,"  as  here  employed,  is  not  quite  free  from  am- 
biguity. It  is  often  used  as  synonymous  with  measure; 
but  the  measures  of  taxation  devised  by  legislators  are 
infinite  in  number.  It  is  obviously  necessary  to  classify 
these  measures,  if  we  treat  them  at  all,  and  the  process 
of  classification  according  to  rational  principles  exempli- 
fies what  is  correctly  denominated  a  method.  At  the  same 
time,  the  practical  applications  of  these  principles  are  in 
common  speech  called  methods,  and  it  would  be  pedantic 
to  ignore  this  usage,  at  least  where  to  adopt  it  will  cause 
no  obscurity. 

There  can  be  no  really  adequate  criticism  of  the  methods 
of  taxation  without  some  consideration  of  the  right  of 
property.  To  tax  is  necessarily  to  interfere  with  this 
right;  the  revenue  of  rulers  is  drawn  from  the  revenue 
of  subjects.  Nor  can  we  determine  the  extent  and  manner 
of  this  interference  without  referring  to  the  commonly 
accepted  principles  of  justice.  For  certain  purposes  we 
may  speak  of  the  wealth  of  a  people  as  an  aggregate ;  but 
we  may  not  in  practice  disregard  the  fact  that  this  wealth 
is  owned  by  a  vast  multitude  of  individuals,  whose  re- 

vii 


viii  INTRODUCTION 

spective  contributions  cannot  be  arbitrarily  fixed.  If  we 
would  examine  the  methods  of  taxation,  therefore,  we 
must  first  ascertain  what  views  prevail  concerning  the 
institution  of  property,  and  what  rules  or  standards  of 
justice  are  generally  recognized  in  dealing  with  it. 

No  writer  appears  to  have  devoted  himself  to  this 
specific  inquiry.  Works  on  taxation  are  numerous;  but 
they  are  usually  either  historical  and  descriptive,  or  in- 
tended to  apply  particular  theories.  Most  of  the  manuals 
of  political  economy  have  something  to  say  about  taxation, 
and  many  valuable  monographs  deal  with  problems  that 
have  from  time  to  time  demanded  immediate  solution. 
But  we  still  lack  a  critical  exposition  of  the  relations  of 
existing  measures  and  systems  of  taxation  to  the  rational 
bases  of  its  methods;  nor,  perhaps,  is  it  too  much  to  say 
that  the  principles  implied  in  such  an  exposition  have 
never  been  clearly  formulated.  Hence  many  vigorous  and 
really  able  commentaries  on  measures  and  systems  of  taxa- 
tion have  been  comparatively  ineffective.  'No  one  can 
scientifically  criticise  the  laws  actually  adopted  by  legis- 
lators without  having  some  ideal  method  in  his  mind; 
and  he  can  hardly  influence  public  opinion  unless  he  not 
only  makes  this  ideal  intelligible,  but  also  establishes  it 
on  rational  grounds. 

No  doubt  there  may  be  permanently  inconsistent  ideals ; 
and  in  that  event  there  will  probably  be  permanent  incon- 
sistencies in  the  laws  regulating  taxation.  But,  on  exami- 
nation, these  inconsistencies  may  be  found  to  be  less  than 
would  naturally  be  inferred  from  the  animated  conflicts 
which  have  raged  over  particular  problems ;  less,  perhaps, 
than  the  participants  in  these  conflicts  themselves  suppose. 
The  controversy  between  the  intuitional  and  utilitarian 


INTRODUCTION  ix 

schools  of  ethics  has  been  prolonged  and  frequently  acri- 
monious; but  when  the  rival  methods  are  put  to  the  test 
of  practice,  they  are  found  to  be  surprisingly  similar  in 
their  operation.  Such  may  prove  to  be  the  case  with  other 
conflicting  ideals ;  but  whether  this  be  true  in  the  case  of 
taxation,  or  not,  the  inquiry  can  hardly  fail  to  be  useful. 
No  one  is  satisfied  with  the  practical  methods  employed 
in  assessing  and  collecting  taxes,  but  there  is  little  agree- 
ment concerning  the  reform  of  these  practices.  The  first 
step  in  such  a  reform  is  to  ascertain  what  these  practices 
imply;  not  merely  to  catalogue  them  as  formulated  in 
laws,  but  to  explain  their  results  and  compare  them  with1 
the  purposes  which  these  results  indicate,  and  with  the 
ideals  which  are  more  or  less  clearly  defined  in  public 
opinion. 

It  should  be  borne  in  mind  throughout  the  discussion  — 
although  the  examination  of  the  subject  must  be  deferred 
to  a  later  stage  —  that  altogether  the  most  prolific  source 
of  confusion,  both  in  practice  and  in  theory,  is  the  preva- 
lent ignorance  concerning  the  process  commonly  called 
the  diffusion  of  taxes.  Much  reasoning,  whether  it  re- 
lates to  proportionate,  or  progressive,  taxation,  is  vitiated 
when  the  nature  of  this  process  is  recognized.  Provided 
the  individual  who  pays  the  tax  can  without  greater  ex- 
ertion increase  his  revenue  to  the  extent  which  the  tax 
decreases  it,  it  is  not  very  material  to  him  whether  the 
tax  is  proportionate  or  progressive,  or  indeed  whether  it 
is  high  or  low.  To  a  certain  extent,  the  truth  of  this 
principle  appears  to  be  recognized,  as  in  the  case  of  cus- 
toms duties.  The  importer  of  dutiable  goods  pays  the 
government  its  tax,  but  he  is  believed  to  reimburse  him- 
self for  his  increased  expense  by  selling  the  goods  at  an 


x  INTRODUCTION 

enhanced  price.  The  American  Sugar  Refining  Company, 
for  instance,  pays  a  great  many  millions  of  dollars  in 
taxes  on  the  sugar  which  it  imports,  but  in  the  public 
belief  it  recovers  these  taxes,  and  perhaps  more  than  re- 
covers them,  from  its  customers,  who  in  turn  recover  them 
from  the  consumers  of  sugar.  On  the  other  hand  the  same 
public  apparently  supposes  that  an  income  tax  must  re- 
duce the  incomes  of  those  only  who  pay  it.  The  con- 
clusions are  on  their  face  inconsistent,  and  there  is 
perhaps  no  clear  understanding  of  the  logical  process  by 
which  they  are  both  maintained. 

It  follows  that  we  must  distinguish  between  permanent 
and  temporary  measures  of  taxation,  for  in  most  cases  a 
tax,  when  first  imposed,  will  diminish  the  revenue  of 
certain  persons,  but  if  it  continues  to  be  levied  will 
diminish  the  revenue  of  others.  In  fact,  temporary  taxes 
hardly  admit  of  scientific  treatment,  but  must  be  regarded 
as  forced  contributions;  for  we  cannot  draw  logical  in- 
ferences unless  we  assume  some  degree  of  permanence  in 
our  premises.  Our  reasoning  therefore  must  relate,  for 
the  most  part,  to  a  stable  system  of  taxation,  with  some 
allowance  for  moderate  changes.  And  this  suggests  a 
further  caution,  that  no  final  judgment  can  be  pronounced 
or  any  tax  considered  by  itself,  but  only  as  related  to  the 
whole  system  of  which  it  is  a  part. 

While  such  an  inquiry  as  this  is  chiefly  of  scientific 
interest,  there  are  two  practical  reasons  for  undertaking 
it.  In  the  first  place,  the  present  laws  and  their  adminis- 
tration in  many  cases  oblige  men  to  conceal  their  wealth 
by  deceit,  falsehood,  and  perjury;  or  else  to  withdraw 
from  certain  occupations  because  they  cannot  compete  with 
those  who  employ  these  agencies.  For  the  same  reason, 


INTRODUCTION  xi 

the  great  class  of  helpless  persons  whose  property  is  con- 
trolled by  trustees  is  everywhere  subjected  to  exceptionally 
heavy  taxation.  In  the  second  place  the  aggregate  of  taxa- 
tion has  so  enormously  increased,  and  shows  so  marked  a 
tendency  to  increase,  as  to  make  the  future  condition  of  the 
mass  of  our  people  a  matter  of  grave  concern.  They  are 
eventually  the  chief,  although  the  ignorant,  victims  of 
misgovernment.  "  The  common  people  of  England,"  ex- 
claimed Adam  Smith,  "  so  jealous  of  their  liberty,  but 
like  the  common  people  of  most  other  countries,  never 
rightly  understanding  wherein  it  consists !  "  —  and  we  can- 
not except  our  people  from  this  description.  History  warns 
us  that  progress  can  be  checked  by  oppressive  taxation, 
and  we  may  well  inquire  into  the  tendencies  of  our  pres- 
ent system. 


THE  METHODS  OF  TAXATION 

CHAPTER  I 

THE  THREE  METHODS  OF  TAXATION 

THE  evident  sincerity  with  which  men  advocate  meas- 
ures of  taxation  that  are  theoretically  irreconcilable  is  a 
striking  proof  of  the  confusion  of  thought  prevailing  on  the 
subject.  Probably  most  of  this  confusion  is  due  to  igno- 
rance; we  are  often  unaware  of  the  extent  to  which  the 
ideals  and  methods  that  recommend  themselves  to  us  have 
been  tested  and  condemned  in  the  past.  But  the  confusion 
does  not  all  arise  from  this  source.  It  is  not  uncommon 
for  men  to  be  influenced  unconsciously  by  conflicting 
ideals,  and  to  favor  at  different  times  and  under  different 
circumstances  practices  conforming  to  one  or  another  of 
these  ideals,  without  being  aware  of  any  inconsistency;  or 
at  least  without  perceiving  the  cause  of  it. 

Thus,  if  we  define  taxation  as  the  process  by  which 
some  of  the  wealth  of  the  subjects  of  a  government  is  trans- 
ferred to  their  rulers,  to  be  employed  for  public  ends,  per- 
haps most  men  would  at  first  assent  to  the  proposition  that 
this  process  attained  ideal  perfection  when  the  smallest 
possible  quantity  of  this  wealth  was  used  up  in  the  trans- 
fer; for  even  those  who  contribute  gladly  to  public  ends 
dislike  to  have  much  of  their  contributions  remain  in  the 
pockets  of  the  tax  gatherers.  So,  too,  the  proposition  that 

the  best  system  of  taxation  is  that  which  least  interferes 

1 


2  THE  METHODS  OF  TAXATION 

with  the  accumulation  of  wealth  would  probably  command 
general  assent.  But  it  is  conceivable  that  the  expense  of 
collecting  the  taxes  so  as  to  attain  this  result  might  be 
greater  than  if  another  end  were  in  view.  For,  under  a 
different  system,  there  might  be  features  so  favorable  to 
large  creations  of  wealth  by  the  "  captains  of  industry  "  as 
to  make  the  greater  cost  of  collection  of  slight  consequence. 
Protective  duties,  for  example,  are  commonly  declared  to 
be  advantageous,  in  spite  of  their  cost,  because  they  in- 
crease the  prosperity  of  the  whole  people.  But  many  would 
question  the  proposition  altogether,  holding  the  acquisition 
of  wealth  not  the  supreme  end,  either  for  individuals  or  for 
nations.  One  country,  they  would  say,  may  be  much  richer 
than  another  of  equal  population ;  but  the  second  country 
may  be  the  happier.  Were  there  no  extremes  of  wealth  and 
poverty,  many  of  the  problems  which  darken  the  future  of 
modern  societies  could  not  arise,  and  the  greater  comfort 
of  the  common  people  might  outweigh  the  diminished  lux- 
ury of  the  rich. 

Such  inconsistencies  are  by  no  means  peculiar  to  the 
views  of  the  ordinary  man.  They  are  illustrated  to  a  re- 
markable extent  in  Adam  Smith's  classical  chapters  on  tax- 
ation. The  enduring  merits  of  his  presentation  of  the 
subject  would  in  any  event  make  it  desirable  to  consider  it ; 
and  on  account  of  its  very  inconsistencies  it  is  the  more 
instructive.  As  it  would  be  a  departure  from  the  usual 
practice  of  writers  on  taxation  not  to  quote  the  celebrated 
four  maxims,  they  are  given  here,  in  a  somewhat  con- 
densed form. 

I.  The  subjects  of  every  state  ought  to  contribute 
toward  the  support  of  the  government,  as  nearly  as  pos- 
sible in  proportion  to  their  respective  abilities;  that  is, 


THE  THREE   METHODS  3 

in  proportion  to  the  revenue  which  they  respectively  en- 
joy under  the  protection  of  the  state. 

II.  The  tax  which  each  individual  is  bound  to  pay 
ought  to  be  certain  and  not  arbitrary.     The  time  of  pay- 
ment, the  manner  of  payment,  the  quantity  to  be  paid, 
ought  all  to  be  clear  and  plain  to  the  contributor  and  to 
every  other  person. 

III.  Every  tax  ought  to  be  levied  at  the  time,  or  in  the 
manner,  in  which  it  is  most  likely  to  be  convenient  for  the 
contributor  to  pay  it. 

IV.  Every  tax  ought  to  be  so  contrived  as  both  to 
take  out  and  to  keep  out  of  the  pockets  of  the  people  as 
little  as  possible  over  and  above  what  it  brings  into  the 
public  treasure  of  the  state. 

The  second  and  third  of  these  maxims  have  been  gener- 
ally accepted  as  indisputable;  but  they  evidently  involve 
much  contentious  matter.  For,  if  it  be  desirable  that  the 
time  of  payment  should  be  certain,  and  clear  and  plain 
to  everyone,  it  might  be  necessary  to  fix  the  time  and  the 
manner  of  payment  without  reference  to  the  convenience 
of  the  contributor.  Taxes  on  real  estate,  for  example,  are 
almost  everywhere  made  payable  at  a  certain  time,  and 
the  contributor  is  subjected  to  a  penalty  if  he  does  not 
pay  them  at  that  time,  whether  it  suit  his  convenience  or 
not.  Moreover,  what  are  known  as  indirect  taxes  have 
been  generally  favored  because  those  who  indirectly  con- 
tribute them  are  not  aware  of  it,  and  are  thus  kept  in 
ignorance,  not  only  of  the  time  and  manner  of  payment, 
but  also  of  the  quantity  to  be  paid.  So  the  suggestion 
that  every  person  should  know  what  others  pay  seems  to 
imply  some  political  end  which  is  not  self-evident;  and 
we  see  that  in  England  much  care  is  taken  that  the  quantity 


4  THE  METHODS  OF  TAXATION 

of  the  tax  paid  by  the  individual  on  his  income  shall  not 
be  disclosed  to  the  public. 

For  similar  reasons,  the  fourth  maxi:  seems  not  to  be 
always  reconcilable  with  the  second  and  third,  although 
the  inconsistency  may  not  be  of  great  importance.  And, 
practically,  it  may  be  urged,  the  three  rules  are  but  more 
specific  statements  of  the  principle  that  taxes  should  be  so 
levied  as  to  cause  the  least  possible  discouragement  to  the 
accumulation  of  wealth.  As  Adam  Smith  observes,  al- 
though vexation  is  not,  strictly  speaking,  expense,  it  is 
certainly  equivalent  to  the  expense  at  which  every  man 
would  be  willing  to  redeem  himself  from  it.  No  doubt 
indirect  taxes  seem  to  take  out  and  to  keep  out  of  the 
pockets  of  the  people  a  great  deal  more  than  direct  taxes, 
over  and  above  what  they  bring  in  to  the  public  treasury; 
yet  the  manner  in  which  they  are  levied  is  so  convenient 
for  contributors  as  greatly  to  diminish  the  force  of  this 
objection.  It  would  be  reasonable  to  maintain,  however, 
that  the  convenience  of  the  contributor  is  to  be  consulted 
through  the  imposition  of  such  taxes  as  are  really  least 
expensive  for  him,  rather  than  those  that  cost  him  more 
without  his  perceiving  it.  In  this  view  the  third  maxim 
is  subordinate  to  the  fourth,  and  the  three  together  may  be 
treated  as  cases  under  the  general  principle  of  economics 
above  stated. 

The  first  maxim,  however,  introduces  a  principle  of  an 
entirely  different  character,  failure  to  notice  which  has 
occasioned  later  writers  some  perplexity.  The  last  three 
of  the  maxims,  as  we  have  seen,  relate  to  the  economy  of 
the  process  of  taxation  in  the  aggregate ;  but  the  first  lays 
down  a  rule  of  justice  with  reference  to  the  rights  of  indi- 
vidual taxpayers.  It  does  not  state  an  economic  principle, 


THE  THREE   METHODS  5 

and  has  no  apparent  relation  to  the  accumulation  of  wealth. 
A  tax  may  be  certain,  convenient,  and  economical,  with- 
out being  at  all  proportioned  to  the  revenue  of  the  tax- 
payer. In  fact,  such  a  tax  might  be  collected  entirely 
from  the  revenue  of  a  small  class  in  the  community.  On 
the  other  hand,  a  tax  proportioned  to  the  revenue  of  the  tax 
payer  might  be  both  inconvenient  and  wasteful.  If  we 
could  discover  a  tax  that  was  at  the  same  time  economical 
and  proportionate  to  revenue,  it  would  accord  with  all  four 
maxims;  but  it  is  significant  that  of  the  twelve  classes 
described  by  Adam  Smith,  all,  with  one  possible  excep- 
tion, offend  against  one  or  more  of  his  maxims,  and  nearly 
all  offend  against  the  first. 

These  maxims,  therefore,  must  be  regarded  as  illustrat- 
ing rather  than  as  dispelling  the  confusion  which  prevails 
concerning  the  methods  of  taxation.  They  are  conflicting, 
and  they  contain  nothing  which  enables  us  to  say  which 
should  prevail.  The  fact  that  Adam  Smith's  treatise  was 
largely  descriptive  and  historical  perhaps  caused  him  to 
overlook  this  inconsistency;  and,  in  fact,  he  introduces  in 
his  recommendations  for  reform  a  principle  repugnant  to 
his  first  maxim.  But  as  this  maxim  evidently  implies  a 
fundamental  principle,  it  has  been  scrutinized  by  later 
writers,  and  some  of  their  criticisms  will  aid  us  in  dis- 
tinguishing the  chief  methods  of  taxation. 

The  comments  of  the  late  Professor  Fawcett  may  be 
quoted  mainly  because  they  illustrate  a  misconception  that 
still  prevails.  He  observes :  "  Notwithstanding  the  defer- 
ence due  to  such  a  high  authority,  we  believe  that  it  will 
be  found  that,  if  the  language  employed  by  Adam  Smith 
is  closely  analyzed,  his  first  maxim  of  taxation  is  not  only 
expressed  in  words  which  are  obscure,  but  that  it  is  almost 


6  THE  METHODS  OF  TAXATION 

useless  for  any  purposes  of  practical  application.  It  will 
be  observed  that  Adam  Smith,  in  the  first  place,  affirms 
that  the  subjects  of  a  state  ought  to  contribute  to  the  sup- 
port of  the  government  in  proportion  to  their  respective 
abilities:  then  he  professes  to  make  this  statement  of  his 
principle  more  clear  by  enunciating  it  in  different  terms; 
for  he  explains  that  '  contributing  to  a  government  in  pro- 
portion to  a  person's  abilities '  is  the  same  thing  as  '  con- 
tributing in  proportion  to  the  revenue  which  he  enjoys 
under  the  protection  of  the  state.'  These  two  statements 
of  the  principle,  if  they  have  any  precise  signification,  do 
not  mean  the  same  but  entirely  different  things." 

It  is  clear,  however,  that  when  Adam  Smith  said  that 
ability  to  contribute  was  to  be  measured  by  revenue,  he 
meant  precisely  what  he  said.  The  fact  that  other  writers 
have  used  the  term  "  ability  "  in  a  different  sense  is  im- 
material, so  long  as  Adam  Smith  defines  the  sense  in 
which  he  uses  it.  Were  there  any  obscurity  in  his  lan- 
guage it  would  be  wholly  removed  by  the  illustration  of 
his  meaning  which  he  at  once  gives.  He  says :  "  The  ex- 
pense of  government  to  the  individuals  of  a  great  nation 
is  like  the  expense  of  management  to  the  joint  tenants  of 
a  great  estate,  who  are  all  obliged  to  contribute  in  pro- 
portion to  their  respective  interests  in  the  estate."  The 
meaning  of  this  comparison  is  unmistakable.  No  matter 
what  the  circumstances  of  the  shareholders  in  a  common 
enterprise  may  be,  or  what  the  inequality  of  their  shares, 
the  principle  of  contribution  stated  by  Adam  Smith  is 
recognized  by  law  and  usage. 

Mill's  criticism  is  from  a  different  point  of  view.  He 
does  not  expressly  state  what  construction  he  puts  on  the 
first  maxim,  but  he  evidently  disapproves  of  Smith's  use 


THE  THREE   METHODS  7 

of  the  term  "  ability."  "  Equality  of  taxation/'  he  de- 
clares, "  as  a  maxim  of  politics,  means  equality  of  sacri- 
fice. It  means  apportioning  the  contribution  of  each  per- 
son towards  the  expense  of  government,  so  that  he  shall 
feel  neither  more  nor  less  inconvenience  from  his  share  of 
the  payment  than  every  other  person  experiences  from  his. 
This  standard,  like  other  standards  of  perfection,  cannot 
be  completely  realized,  but  the  first  object  in  every  prac- 
tical discussion  should  be  to  know  what  perfection  is.  ... 
Setting  out,  then,  from  the  maxim  that  equal  sacrifices 
ought  to  be  demanded  from  all,  we  have  next  to  inquire 
whether  this  is  in  fact  done,  by  making  each  contribute 
the  same  percentage  of  his  pecuniary  means.  ...  To  take 
a  thousand  a  year  from  the  possessor  of  ten  thousand, 
would  not  deprive  him  of  anything  really  conducive  either 
to  the  support  or  to  the  comfort  of  existence ;  and  if  such 
would  be  the  effect  of  taking  five  pounds  from  one  whose 
income  is  fifty,  the  sacrifice  required  from  the  last  is  not 
only  greater  than,  but  entirely  incommensurable  with,  that 
imposed  upon  the  first.  The  mode  of  adjusting  these  in- 
equalities of  pressure  which  seems  to  be  the  most  equitable, 
is  that  recommended  by  Bentham,  of  leaving  a  certain 
minimum  of  income,  sufficient  to  provide  the  necessaries 
of  life,  untaxed." 

We  have  here  a  definition  of  equal  taxation  essentially 
different  from  that  formulated  by  Adam  Smith.  He  main- 
tained that  every  subject  should  contribute  in  proportion 
to  his  revenue.  Mill  maintains  that  every  subject  should 
contribute  in  inverse  proportion  to  the  discomfort  which 
he  suffers  from  making  his  contribution.  Now  it  is  evi- 
dent that  a  psychological  investigation  into  the  quantity 
of  pain  endured  by  every  individual  taxpayer  in  a  nation 


8  THE  METHODS  OF  TAXATION 

is  impracticable:  it  would  be  necessary  to  ascertain  the 
amount  of  the  wealth  owned  by  the  individual,  and  then 
to  estimate  the  pain  or  discomfort  caused  by  the  various 
rates  of  deduction  through  taxation.  Some  allowance  may 
perhaps  be  made  for  certain  peculiarities  in  the  circum- 
stances of  individual  taxpayers ;  their  net  wealth,  we  may 
say,  rather  than  their  gross  wealth,  should  be  estimated. 
But  the  point  is  that  we  must  assume  a  quantitative  rela- 
tion beween  feeling  and  material  possessions;  the  pos- 
sessor of  large  wealth  must  be  held  to  suffer  less  pain  from 
the  decrease  of  his  revenue  by  a  proportionate  part  than 
the  poor  man  suffers  by  a  corresponding  decrease.  Hence 
the  conclusion  follows  that  every  subject  should  contribute 
not  in  a  simple  proportion,  but  in  some  geometrical  pro- 
portion to  his  wealth  or  revenue.  Mill  indeed  seems  in- 
clined to  go  somewhat  further  than  this,  and  to  hold  that 
the  very  poor  should  pay  no  taxes  at  all.  As  taxation 
according  to  this  principle  has  come  to  be  known  as  "  pro- 
gressive," it  will  be  convenient,  in  referring  to  it,  to  adopt 
that  term. 

Here,  then,  we  find  illustrated  three  quite  distinct  and 
apparently  conflicting  methods  employed  by  men  in  their 
reasoning  about  taxation.  As  we  have  said,  the  method 
suggested  by  Adam  Smith  in  his  first  maxim  may  be  desig- 
nated the  proportionate  method;  that  proposed  by  Mill 
may  be  called  the  progressive  method ;  and  that  deducible 
from  Smith's  other  maxims  we  shall  term  the  economic 
method.  The  ideals  implied  in  these  methods  are  pre- 
sumptively inconsistent.  The  ideal  of  the  proportionate 
method  is  simply  proportionality:  that  taxation  should  be 
contrived  with  the  purpose  of  taking  from  every  subject 
the  same  proportionate  part  of  his  wealth.  This  ideal 


THE  THREE  METHODS  9 

might  be  defined  with  reference  to  the  subject  as  quanti- 
tative, or  mathematical,  equality.  The  ideal  of  the  pro- 
gressive method  may  be  called  socialistic.  The  existing 
distribution  of  wealth  is  deemed  unjust.  A  part  of  the 
possessions  of  those  who  have  greater  wealth  should  be 
taken  from  them,  and  given  to,  or  applied  to  the  use  of, 
those  who  have  less;  and  taxes  should  be  contrived  with 
this  purpose  in  view.  The  ideal  here  is  apparently  equal- 
ity, or  equalization,  of  sacrifice  on  the  part  of  the  subjects. 
The  ideal  of  the  third,  or  economic,  method  seems  to  be 
predominantly  fiscal.  The  first  and  second  ideals  are  per- 
sonal in  character;  they  have  reference  to  the  circum- 
stances of  the  individuals  constituting  the  state.  The  third 
is  impersonal;  it  is  concerned  with  the  total  amount  of 
wealth,  not  with  its  ownership  or  distribution,  although 
it  seems  to  imply  that  the  increase  of  the  wealth  of  human 
beings  is  a  desirable  end,  and  that  taxation  should  be  con- 
trived with  the  purpose  of  interfering  as  little  as  possible 
with  its  attainment. 

Still,  we  are  not  compelled  to  assume  that  these  ideals 
are  necessarily  attainable  only  by  their  respective  methods. 
Taxes  might  conceivably  be  levied  in  accordance  with 
either  the  first  or  the  second  ideal,  and  attain  the  third. 
We  might  find  that  the  wealth  of  the  community  reached 
the  highest  possible  figure  under  a  progressive  income  tax, 
or  under  a  general  property  tax,  and  in  either  case  the 
fiscal  ideal  would  be  realized.  But  the  converse  of  this 
seems  less  easily  conceivable.  It  might  be  true  that  taxa- 
tion according  to  the  economic  method  would  result  in 
quantitative  equality,  but  no  one  appears  to  contend  that 
such  taxation  would  bring  the  socialistic  ideal  to  pass. 

But  however  this  may  be,  these  ideals  must  be  respee- 


10  THE  METHODS  OF  TAXATION 

tively  supreme  in  their  different  methods.  A  socialist 
might  hold  that,  in  taxation,  the  proportionate  or  the  fiscal 
ideal  was  most  satisfactory ;  and  those  who  accept  the  fiscal 
ideal  are  by  no  means  committed  to  the  proposition  that 
the  present  distribution  of  wealth  is  ideally  just,  or  even 
the  best  practically  obtainable.  They  might  even  judge  a 
state  where  there  was  less  wealth,  equally  distributed,  to 
be  happier  than  one  where  there  was  more  wealth  but  less 
equality.  But  they  would  hold  either  that  the  present 
order  is  so  rooted  in  the  nature  of  things  that  it  cannot 
be  altered  by  legislation,  or  that  the  proper  way  to  reduce 
excessive  accumulations  of  wealth  in  the  hands  of  individ- 
uals is  not  to  confiscate  them  after  they  have  been  acquired, 
but  to  remove  the  causes  that  enable  men  to  acquire  them ; 
for  if  those  causes  cannot  be  removed,  the  evil  might  be 
aggravated  rather  than  cured  by  taxation.  It  is  the  end 
to  be  attained  in  levying  taxes  that  differentiates  the 
methods.  In  every  method  a  certain  purpose  must  con- 
trol. Other  purposes  must  be  collateral  and  subordinate; 
and  it  is  immaterial  to  this  inquiry  that  such  purposes 
exist,  or  even  what  Utopias  men  imagine,  except  in  so  far 
as  we  find  them  conflicting  with  the  premises  necessary 
to  rational  procedure. 

Yet  so  many  complaints  are  heard  of  the  tendency  of 
existing  measures  of  taxation  to  encourage  dishonesty,  as 
to  make  it  worth  while  to  inquire  whether  we  should  not 
recognize  a  fourth  method.  The  ideal  of  such  a  method 
would  seem  to  be  the  promotion  of  virtue,  and  the  purpose 
to  be  attained  in  taxation  would  be  predominantly  ethical. 
Taxes  should  be  so  levied  as  to  elevate  the  morals  of  the 
taxpayer,  or  at  least  not  to  deprave  them.  It  is  certainly 
paradoxical  to  deny  such  a  proposition,  for  we  consider 


THE  THREE  METHODS  11 

that  the  whole  system  of  legislation  should  promote  virtue, 
and  the  laws  regulating  taxation  are  a  part  of  this  system. 
Hence  we  seem  committed  to  a  political  and  ethical  in- 
quiry of  rather  wide  scope. 

Now,  to  a  certain  extent,  this  is  what  is  contemplated 
in  the  present  investigation ;  for  both  the  proportionate  and 
the  progressive  methods  make  professedly  ethical  claims, 
which  it  is  our  business  to  test.  These  methods,  as  we  have 
seen,  are  personal ;  they  propose  in  adjusting  taxation  to 
regard  the  circumstances  of  every  individual.  And  as 
their  very  aim  and  purpose  is  declared  to  be  the  attainment 
of  justice,  it  seems  absurd  to  say  that  the  effect  of  such 
adjustment  on  the  morals  of  the  individual  is  immaterial. 
For,  however  we  define  the  concepts  of  virtue  and  justice, 
we  certainly  do  not  think  that  justice  can  be  attained  by 
discouraging  virtue.  Should  it  appear,  therefore,  that  the 
practical  application  of  the  first  two  methods  actually 
hinders  virtuous  action,  the  fact  that  they  profess  the  at- 
tainment of  justice  as  their  ideal  would  not  save  them 
from  condemnation. 

It  is  true  that  the  economic  method  makes  no  such 
claims.  It  professes  to  be  impersonal;  it  is  apparently 
concerned  with  the  increase  of  wealth  rather  than  the  in- 
crease of  virtue.  Indeed,  as  we  shall  see,  it  abandons  the 
attempt  to  ascertain  the  wealth  of  the  individual  as  futile ; 
and  if  we  cannot  even  find  out  how  rich  every  man  is,  we 
certainly  cannot  estimate  the  extent  of  his  virtue.  Never- 
theless, the  moralist  can  say  that  the  promotion  of  virtue 
is  a  criterion  to  which  the  economic  method,  like  the  others, 
must  submit.  For  if  we  should  find  by  experience  that  this 
method  does  deprave  men,  we  should  certainly  condemn  it ; 
and  hence  it  is  legitimate  to  inquire  into  its  ethical  results. 


12  THE  METHODS  OF  TAXATION 

And,  as  a  matter  of  fact,  the  advocates  of  this  method 
claim  as  one  of  its  chief  merits  that  in  practice  it  removes 
much  temptation  to  falsehood  and  dishonesty,  and  relieves 
virtuous  people  from  the  penalties  to  which  they  are  sub- 
jected by  the  other  methods.  These  claims,  of  course, 
challenge  examination,  and  imply  the  supremacy  of  the 
standard  that  might  at  first  seem  irrelevant.  Yet,  after 
all,  a  standard  so  purely  formal  as  this  seems  to  be  prop- 
erly described  as  a  test  or  criterion  of  methods  of  taxation, 
rather  than  as  itself  a  method. 

It  is  to  be  added  that  the  fact  that  taxes,  however  levied, 
are  always  and  necessarily  paid  by  persons,  is  a  dominating 
consideration.  The  exaction  of  these  payments  cannot  be 
successfully  carried  on  in  defiance  of  the  convictions  of 
those  who  make  them.  Every  taxpayer  is  disposed  to 
scrutinize  the  amount  of  his  contribution  and  the  manner 
in  which  it  is  collected,  and  to  compare  his  payments  with 
those  of  his  neighbors.  Under  such  conditions  the  legis- 
lators cannot  ignore  ethical  considerations;  their  demand 
for  recognition  is  so  imperative  as  to  make  the  fiscal  end 
appear  subordinate.  If  taxation  is  to  be  scientific,  it  must 
be  a  continuous  and  substantially  permanent  process,  which 
it  cannot  be  if  its  practical  applications  are  condemned 
by  public  opinion.  That  opinion  would  incessantly  in- 
terrupt and  alter  the  process,  thereby  destroying  the  eco- 
nomic gain  of  permanency.  The  fiscal  method,  in  short, 
would  be  impracticable  if  men  were  rationally  convinced 
that  it  was  unjust. 

As  has  been  intimated,  however,  there  is  in  theory 
nothing  incompatible  between  a  fiscal  and  an  ethical  end. 
The  two  ends  may  coincide;  and  in  the  sequel  we  shall 
perhaps  find  reason  to  believe  that  they  tend  to  coincide. 


THE  THREE   METHODS  13 

'But  this  is  far  from  self-evident,  and  in  such  a  community 
as  ours,  with  such  a  confusion  of  taxes  as  here  exists,  it 
would  be  idle  to  examine  methods  of  taxation  without 
some  preliminary  inquiry  concerning  prevalent  concep- 
tions of  justice.  Under  a  despotism,  or  even  under  an 
aristocracy,  taxation,  when  not  very  oppressive  and  vexa- 
tious, may  be  regulated  without  asking  whether  its  methods 
would  meet  the  approval  of  the  mass  of  the  subjects,  if 
they  were  consulted.  The  two  hundred  and  fifty  millions 
of  people  inhabiting  British  India,  for  example,  are  taxed 
at  the  discretion  of  a  very  few  men,  according  to  principles 
which  the  taxpayers  no  more  think  of  questioning  —  or  of 
understanding  —  than  they  do  the  causes  of  the  monsoon. 
Much  the  same  is  true  of  taxation  in  such  a  country  as 
Russia ;  but  in  a  community  where  public  opinion  is  alert, 
no  system  of  taxation  can  be  accepted  as  permanent  unless 
rational  grounds  are  offered  for  holding  it  just;  or,  at 
least,  as  resulting  in  as  near  an  approach  to  justice  as 
could  be  attained  under  any  other  system. 

But  when  we  ask  what  is  meant  by  justice,  we  find  our- 
selves at  once  perplexed.  Philosophers,  from  Plato  to 
Spencer,  have  labored  to  define  it.  The  search  has  been 
instructive  and  fruitful,  but  it  has  not  resulted  in  a  defini- 
tion that  has  been  universally,  or  even  generally,  accepted, 
or  that  appears  to  apply  satisfactorily  to  all  the  cases 
arising  in  practice.  In  truth,  the  word  has  many  mean- 
ings. The  standards  of  morality  are  not  the  same  for  all 
races,  or  for  all  members  of  the  same  race.  They  vary  in 
different  sections  of  the  same  country,  and  among  different 
classes  in  the  same  community.  In  the  last  analysis  every 
responsible  human  being  must  have  his  own  standard  of 
right  and  wrong,  and  it  is  only  by  yielding  and  modify- 


14  THE  METHODS  OF  TAXATION 

ing  his  own  convictions  that  he  can  attain  a  modus  vivendi 
with  his  neighbors.  Hence  if  any  standard  of  right  or 
justice  can  be  said  to  prevail  in  a  society,  it  must  be  the 
result  of  compromises  so  numerous  and  so  extensive  as  to 
make  scientific  definition  very  difficult.  To  compromise 
is  to  deviate  from  a  standard;  and,  where  many  indi- 
viduals are  concerned,  the  degrees  of  variation  and  the 
reasons  for  them  become  quite  incalculable. 

Nor  may  we  forget  to  what  extent  the  judgments  which 
men  pronounce  are,  if  not  irrational,  at  least  unrational. 
As  Swift  said,  the  proper  definition  of  man  is  not  animal 
rationale,  but  at  most  rationis  capax.  As  men's  conduct 
is  largely  determined  by  instinct  or  impulse,  so  their  con- 
clusions are  affected  by  prejudice  and  habit.1  It  follows 
that  large  fields  of  human  activity  are  almost  outside  of 
the  scope  of  reason.  Precedent  commonly  controls,  and 
whatever  has  been  held  just  in  the  past  continues  to  be 
called  just  in  the  present.  Under  such  conditions,  progress 
unavoidably  brings  confusion.  Precedents  become  often 
absurdly  inapplicable ;  "  vested  rights  "  are  transformed 
into  vested  wrongs;  and  law,  administered  according  to 
obsolete  standards,  may  illustrate  the  maxim  "  Summum 
jus,  summa  injuria." 

For  the  present  purpose,  at  any  rate,  we  cannot  proceed 
on  the  theory  that  justice  is  something  so  absolute  and 
permanent  in  its  nature  as  to  be  susceptible  of  exact  defi- 
nition. To  be  universally  applicable,  any  definition  must 

1  "  In  fact  most  persons  are  liable  to  confound  intuitions  on  the  one 
hand  with  mere  impressions  or  impulses,  which  to  careful  observation 
do  not  present  themselves  as  claiming  objective  validity;  and  on  the 
other  hand,  with  mere  opinions,  to  which  the  familiarity  that  comes 
from  frequent  hearing  and  repetition  often  gives  an  illusory  air  of  self- 
evidence  which  attentive  reflection  disperses."  SIDGWICK,  Methods  of 
Ethics,  Book  III,  Chap.  XI. 


THE  THREE   METHODS  15 

be  so  general  in  its  terms  as  to  be  practically  useless. 
All  would  agree  that  laws  that  promote  the  general  welfare 
are  just;  but  if  we  should  examine  the  numerous  acts 
of  Congress  that  profess  to  comply  with  this  constitutional 
mandate,  we  should  find  ourselves  no  nearer  a  satisfactory 
definition  of  justice.  We  must  be  content  to  adopt,  as  on 
the  whole  most  rational,  the  standards  proved  by  expe- 
rience to  be  most  generally  acceptable,  to  reconcile  their 
differences  so  far  as  we  can,  and  to  show  to  what  extent 
men  fail  to  apply  consistently  the  standards  which  they 
actually  recognize. 

Of  course  it  is  axiomatic  that  propositions  accepted  as 
self-evident  must  not  conflict  with  one  another;  for  in 
such  event  not  all  the  propositions  can  be  true.  In  the 
case  of  an  individual  man  professing  to  adopt  his  con- 
clusions rationally,  there  is  no  escape  from  the  necessity 
of  harmonizing  his  intuitions.  But  when  we  consider  a 
multitude,  even  as  members  of  the  same  society,  we  can- 
not insist  on  such  harmony.  Hence  we  are  limited  to 
universal  consent  as  the  test  of  the  truth  of  the  funda- 
mental principles  of  justice.  The  maxim  quod  semper, 
quod  ubique,  quod  ab  omnibus,  furnishes  an  empirical 
standard  quite  as  high  as  can  be  here  applied.  Our 
course,  therefore,  must  be  to  proceed  per  enumerationem 
simplicem;  to  collect  the  current  judgments  concerning 
just  methods  of  taxation,  and  to  compare  them  with  such 
leading  principles  or  practical  rules  as  are  universally 
accepted  as  politically  just,  or  are  at  least  not  rejected 
on  rational  grounds  by  any  considerable  number  of  men. 

It  is  true  that  universal  consent  does  not  establish  any 
proposition  scientifically;  too  many  absurdities  have  in 
the  past  been  implicitly  endorsed  by  public  opinion  for 


16  THE  METHODS  OF  TAXATION 

such  a  contention  to  maintain  itself.  ~Nor  may  we  expect 
that  those  who  are  in  the  habit  of  speaking  of  justice  — 
usually  in  figurative  terms  and  with  emotional  emphasis 
—  as  something  absolute  and  unchangeable,  will  be  content 
to  subject  this  sublimated  conception  to  the  vagaries  of 
popular  opinion.  But  as  these  persons  have  not  presented 
a  definition  of  this  exalted  entity  which  has  either  been 
generally  accepted,  or  conclusively  established  on  rational 
grounds,  their  claims  do  not  need  to  be  considered  in  the 
present  inquiry.  To  frame  on  rational  principles  an  ideal 
system  which  every  one  must  accept  as  just,  would  cer- 
tainly be  desirable,  if  it  could  be  done;  but  it  is  more 
than  is  here  attempted.  Still,  we  may  say,  it  would  open 
the  way  for  the  establishment  of  such  a  system  if  men 
could  be  brought  to  see  clearly  what  principles  they  do 
accept  as  essentially  just,  and  what  corollaries  are  implied 
in  these  principles.  They  may  not  at  present  be  fully 
aware  of  the  methods  which  they  actually  employ,  but 
they  may  recognize  them  when  explained,  and  admit  their 
cogency  in  cases  to  which  they  might  not,  without  re- 
flection, have  supposed  them  to  be  applicable. 

The  difficulty  of  the  inquiry  is  somewhat  lessened,  be- 
cause what  we  are  concerned  to  discover  is  that  quality 
in  the  acts  of  our  rulers  which  men  commonly  approve 
as  just,  rather  than  such  a  quality  in  human  acts  gener- 
ally. There  must  of  course  be  some  analogy  between  the 
acts  of  an  individual  and  those  of  such  a  corporation  as 
a  government.  Every  government  is  administered  by 
men,  and  they,  and  the  citizens  who  maintain  them  in 
office,  are  in  some  degree  responsible  for  the  morality  of 
governmental  conduct.  But  the  rules  applicable  to  such 
conduct  are  not  only  less  severe  than  those  of  the  indi- 


THE  THREE   METHODS  17 

vidual  conscience,  but  are  also  far  simpler.  Diplomatists 
have  usually  been  gentlemen,  and,  as  individuals,  have 
regarded  lying  as  dishonorable.  But  in  former  times, 
if  not  now,  they  have  felt  it  not  incompatible  with  honor 
to  lie  for  their  governments ;  and  soldiers  do  not  hesitate 
at  deeds  which,  as  human  beings,  they  execrate.  When- 
ever one  person  acts  as  the  agent  of  another,  responsibility 
is  lessened  and  moral  standards  are  lowered.  The  officer 
of  a  government,  like  the  servant  of  any  other  corpora- 
tion, throws  the  responsibility  for  his  acts  on  his  em- 
ployers; and  rulers  and  directors  divide  the  burden  with 
one  another  and  with  those  who  have  placed  them  in  their 
positions.  It  is  hardly  possible  to  find  an  instance  in 
history  where  the  conduct  of  a  government  has  been  such 
as  fully  to  meet  the  requirements  of  the  rules  of  morality 
accepted  by  its  subjects,  and  we  must  therefore  apply  a 
comparatively  low  standard  in  testing  the  justice  of  gov- 
ernmental action. 

That  the  rules  applicable  to  the  conduct  of  government 
are  simpler  than  those  affecting  individual  morality,  is 
evident  when  we  consider  how  small  a  portion,  relatively, 
of  human  conduct  falls  under  the  control  of  the  magis- 
trate. Religion  is  now  almost  exempt  from  governmental 
interference;  most  duties  arising  from  the  domestic  re- 
lations and  those  of  friendship,  even  those  of  ordinary 
intercourse,  do  not  very  often  need  to  be  enforced  by  law. 
Moreover  we  do  not  need  to  inquire  into  the  justice  of  all 
the  acts  of  government,  but  only  a  special  class  of  them. 
For  example,  if  we  were  obliged  to  ask  concerning  the 
justice  of  the  purposes  for  which  the  government  spends 
its  revenue,  the  field  of  investigation  would  be  greatly 
broadened  and  its  nature  would  be  very  different.  It  is 

2 


18  THE  METHODS  OF  TAXATION 

not  always  practicable  to  ignore  questions  of  this  kind ;  but 
to  discuss  them  adequately  would  so  complicate  our  under- 
taking that  we  are  compelled  to  assume  that  revenue  is 
to  be  properly  spent,  and  confine  ourselves  to  the  exami- 
nation of  the  justice  of  the  methods  by  which  it  is  raised. 

This  course  has,  it  is  true,  an  arbitrary  look.  It  seems 
reasonable  to  say  that  the  purpose  of  levying  taxes  is  to 
confer  benefits,  and  that  we  cannot  properly  decide  on 
the  justice  of  the  methods  of  imposing  burdens,  without 
considering  what  is  just  in  the  distribution  of  benefits,  or 
"  dispensing  justice."  But  we  are  not  prepared  to  as- 
sume that  government  is  an  agency  for  the  equal  distribu- 
tion of  benefits;  or  that,  if  it  is  to  undertake  this  task, 
it  must,  as  would  be  necessary,  take  cognizance  of  the 
circumstances  of  every  subject,  in  order  to  establish  a 
correspondence  in  the  apportionment  of  benefits  and  bur- 
dens. All  that  can  be  conceded  is  that  it  would  be  de- 
sirable, if  practicable,  to  consider  the  chief  ends  for  which 
taxes  are  expended,  while  we  are  examining  the  methods 
of  taxation,  and  that  this  may  be  done  to  some  extent. 
Hardly  anyone  would  assert  that  there  is,  for  example, 
any  known  method  of  determining  the  proportionate  bene- 
fit, to  a  citizen  of  an  interior  state,  of  the  building  of  a 
man-of-war,  or  of  a  public  edifice  a  thousand  miles  away, 
or  of  the  construction  of  a  canal  at  Panama,  or  of  pro- 
tective duties  generally;  and  it  is  impossible  to  estimate 
the  gain  to  a  childless  man  of  free  public  schools.  Such 
inquiries,  however  complicated,  are  of  course  legitimate; 
but  to  attempt  them  here  would  expand  this  essay  into  a 
treatise  on  government  in  general,  and  would  render  hope- 
less the  attainment  of  the  specific  end  proposed. 

This  point  is  of  such  importance  as  to  make  further 


THE  THREE   METHODS  19 

illustration  desirable,  and,  although  it  will  involve  some 
repetition  in  the  sequel,  we  shall  take  it  from  Mill's  criti- 
cism of  the  doctrine  that  taxation  should  vary  with  the 
amount  of  protection  afforded  by  government.  He  asserts 
that  government  does  not  exist  solely  for  the  protection 
of  persons  and  property;  and  he  also  denies  that  to  be 
protected  in  the  ownership  of  ten  times  as  much  property 
is  to  be  ten  times  as  much  protected.  He  concludes  with 
this  proposition :  "  If  there  were  any  justice  in  the  theory 
of  justice  now  under  consideration,  those  who  are  least 
capable  of  helping  or  defending  themselves,  being  those 
to  whom  the  protection  of  government  is  the  most  indis- 
pensable, ought  to  pay  the  greatest  share  of  the  price ;  the 
reverse  of  the  true  idea  of  distributive  justice,  which  con- 
sists not  in  imitating  but  in  redressing  the  inequalities 
and  wrongs  of  nature." 

Many  persons,  however,  would  not  accept  this  definition 
of  distributive  justice,  'which  they  regard  as  limited  to 
redressing  the  inequalities  and  wrongs  created  by  human 
institutions.  They  consider  that  the  advantages  of  strength 
—  physical,  intellectual,  and  moral  —  cannot  be,  and 
should  not  be,  conferred  on  weakness.  They  regard  it 
as  unjust  to  exempt  lazy  and  vicious  men  from  the  con- 
sequences of  their  acts,  and  doubt  if  justice  requires  that 
the  weak  should  pay  nothing  for  the  protection  which  is 
provided  by  the  strong.  They  dread  the  results  of  offer- 
ing a  premium  to  feebleness  and  incapacity,  and  thereby 
hampering  the  development  of  superior  natural  endow- 
ments. In  fact,  they  would  hold  it  decidedly  advantage- 
ous, politically,  for  every  citizen  to  contribute,  and  to 
know  that  he  contributes,  to  the  support  of  the  govern- 
ment. Some  persons  would  even  go  so  far  as  to  maintain 


20  THE  METHODS  OF  TAXATION 

that  if  this  knowledge  were  brought  home  to  the  members 
of  the  inferior  classes  of  society,  they  might  effectively 
insist  on  such  reforms  in  government  as  would  come  near 
to  reduce  the  price  of  protection  to  an  insignificant  figure. 
These  opinions  are  not  without  plausibility;  but  we  no- 
tice them  here,  not  to  take  part  in  the  controversy,  but 
merely  to  indicate  the  complications  avoided  by  exclud- 
ing from  this  inquiry  such  contentious  matter  as  does  not 
positively  demand  consideration. 

When  we  examine  the  system  of  laws  under  which  we 
live,  and  in  harmony  with  which  the  constitutions  of  our 
bodies  politic  have  been  framed,  we  find  certain  princi- 
ples, or  rules  of  conduct,  so  thoroughly  imbedded  in  this 
jurisprudence  as  to  give  it  its  most  distinctive  features; 
and  we  also  find  these  features  commanding  the  approval 
of  the  most  enlightened  observers  in  all  countries.  These 
rules  could  not  have  attained  their  position,  or  retained 
it  when  attained,  had  they  not  been  recognized  as  just 
by  those  who  have  only  to  obey  the  laws  as  well  as  by 
those  who  make  them.  They  pervade  the  morality  of 
common  life,  and  are  universally  appealed  to  as  axioms 
of  justice.  It  seems  reasonable,  therefore,  to  regard  those 
rules  of  justice  which  men  practically  assume  in  their 
daily  conduct,  as  having  superior  validity  to  those  which 
are  disputed,  and  as  presumptively  controlling  in  the 
matter  of  taxation.  Hence  the  claim  that  any  particular 
measure  or  any  particular  method  is  required  by  justice 
must  be  tested  by  these  rules ;  and,  unless  very  substantial 
reasons  can  be  given  why  this  test  should  not  be  conclu- 
sive, such  claims  as  cannot  endure  it  must  be  rejected. 

In  ascertaining  these  principles  two  courses  of  pro- 
cedure are  open  to  us.  We  may  examine  the  current 


THE  THREE   METHODS  21 

maxims  of  morality  in  the  light  afforded  by  the  treatises 
on  jurisprudence,  the  decisions  of  courts  of  justice,  the 
bills  of  rights,  and  the  constitutions  of  bodies  politic ;  and, 
selecting  such  principles  as  we  find  common  to  all  these 
sources,  apply  them  to  the  methods  of  taxation.  Or  we 
may  begin  by  testing  the  assumptions  of  the  methods  of 
taxation,  by  examining  and  comparing  the  arguments  used 
in  their  support,  and  the  criticisms  to  which  they  have 
been  subjected.  This  examination  will  disclose  appeals, 
implicit  or  avowed,  to  the  rules  of  justice  of  which  we  are 
in  search,  and  which  may  be  verified  by  reference  to  the 
sources  enumerated  above.  The  former  course  would  be 
the  more  scientific,  were  our  aim  to  develop  a  system  of 
jurisprudence  to  which  taxation  should  be  made  to  con- 
form. The  latter  course  seems  more  appropriate,  when 
the  aim  is  to  test  methods  of  taxation  by  accepted  stand- 
ards of  justice;  and  as  it  has  the  further  advantage  of 
corresponding  with  the  course  naturally  adopted  by  any- 
one who  proposes  to  inquire  into  these  methods,  we  may 
give  it  the  preference.  Adopting  it,  we  find  ourselves  at 
once  confronted  with  the  problems  arising  from  the  right 
of  property;  for  the  first  two  methods  appear  to  involve 
certain  assumptions  concerning  the  distribution  of  wealth, 
on  which  we  cannot  pass  without  considering  what  the 
ownership  of  wealth  involves.  We  are  thus  led  to  proceed, 
somewhat  informally,  to  an  examination  of  the  nature 
of  property,  and  the  limitations  of  it,  if  any,  that  are 
justly  demanded  in  our  society. 


CHAPTER   II 

NATURE  AND  LIMITATIONS  OF  PROPERTY 

AT  first  thought,  perhaps,  most  men  would  to-day  admit, 
as  has  been  generally  admitted  in  the  past,  that  Adam 
Smith's  leading  maxim  embodies  the  most  simple  and  ob- 
vious method  of  attaining  justice  in  taxation.  The  anal- 
ogy of  the  contribution  of  the  tenants  of  a  great  estate  is 
very  effectively  employed,  for  such  a  method  of  contribu- 
tion is  recognized  as  just,  both  in  business  and  in  law. 
It  is  true  that  we  are  not  now  familiar  with  great  estates 
parcelled  out  among  tenants ;  but  nothing  is  more  common 
than  co-tenancy  as  partners  and  stockholders,  and  in  such 
affairs  no  other  method  of  apportioning  expense  than  that 
of  contribution  in  proportion  to  interest,  or  revenue,  ap- 
pears ever  to  be  thought  of  as  just.  Even  the  most  radical 
reformer  would  reject  as  visionary  a  proposal  that  the 
shares  of  the  poorer  owners  of  a  railroad  should  be  ex- 
empted from  their  proportionate  part  of  the  operating 
expenses,  or  that  the  dividends  of  the  holders  of  many 
shares  should  be  at  a  less  rate  than  that  paid  to  the  holders 
of  a  few. 

But,  if  we  examine  the  analogy  more  carefully,  we  find 
that  it  is  imperfect;  and  imperfect  at  the  critical  point. 
For  the  associations  in  which  men  engage  for  business 
purposes  are  all  formed  by  deliberate  agreement,  and  these 
agreements  always  provide,  or  at  least  assume,  that  the 
necessary  disbursements  shall  be  made  from  funds  con- 
tributed by  the  participants  in  proportion  to  their  respec- 


LIMITATIONS  OF  PROPERTY  23 

tive  interests.  This  method  of  contribution,  therefore,  is 
unquestioned,  because  by  the  very  act  of  agreement  it  is 
explicitly  recognized  as  just  No  one  denies  the  justice 
of  holding  men  to  such  promises,  and  it  is  immaterial 
whether  this  method  would  be  regarded  as  just  or  not, 
had  it  not  been  adopted;  although,  no  doubt,  the  fact 
that  it  has  been  universally  adopted  indicates  that  it  is 
not  regarded  as  unjust. 

The  members  of  that  community  or  association  which 
we  call  the  state  have  entered  into  no  such  agreement  for 
contribution.  Many  writers  have  found  it  convenient  for 
their  theories  to  assume  that  states  were  at  some  remote 
period  formed  by  agreements  or  compacts  between  all  their 
members ;  but  no  one  now  claims  that  there  is  any  historical 
basis  for  this  assumption.  Nor  can  it  be  maintained  with- 
out question  that  our  remote  ancestors  had  any  authority 
to  enter  into  agreements  binding  their  posterity,  even  if 
they  bound  themselves.  Nor,  if  this  were  conceded,  would 
it  be  possible  to  show  that  the  method  of  contribution  in 
proportion  to  revenue  was  implied  in  any  of  the  social 
compacts  which  have  been  attributed  to  mankind. 

Furthermore,  it  is  urged  with  much  force,  justice  re- 
quires that  many  of  the  methods  and  institutions  defended 
by  the  fiction  of  an  ancestral  compact  should  be  changed; 
and  it  does  not  seem  possible  to  deny  this,  unless  we  are 
prepared  to  maintain  that  every  change  is  unjust.  No 
one,  however,  would  say  that  justice  forbids  living  men 
to  modify  the  customs  established  by  those  long  dead,  and 
even  if  we  found  the  method  of  proportionate  contribution 
imbedded  in  our  law,  we  need  not  infer  that  it  is  now  a 
just  method.  We  cannot,  therefore,  regard  its  justice  as 
proved  by  the  analogy  drawn  from  a  joint-stock  corpora- 


24  THE  METHODS  OF  TAXATION 

tion  or  co-tenancy  in  a  great  estate ;  nor  does  it  command 
such  universal  assent  as  to  enable  us  to  adopt  it  as  self- 
evident.  The  most  that  can  be  said  is  that  if  the  present 
institutions  cause  wealth  to  be  distributed  justly,  or  even 
with  a  reasonable  approach  to  justice,  the  burdens  of 
taxation  may  with  as  much  justice  be  correspondingly 
distributed. 

But  hardly  any  one  maintains  that  the  present  distribu- 
tion of  wealth  is  ideally  just ;  nor  is  it  easy  to  imagine  a 
definition  of  justice  that  would  be  satisfied  by  existing 
conditions.  The  expression  of  discontent  with  these  con- 
ditions is  common;  it  is  frequently  earnest  and  even  vio- 
lent. The  gravamen  of  the  complaint  is  the  great  in- 
equality in  the  possessions  of  individual  owners;  from 
which  it  appears  that  justice,  in  the  opinion  of  the  dis- 
contented, means  a  certain  equality  in  the  size  of  estates. 
Now,  however  vague  the  concept,  the  word  "  equality  "  is 
fundamental  in  our  constitutions.  The  proposition  that 
all  men  are  created  equal,  and  have  equal  rights  to  life, 
liberty,  and  the  pursuit  of  happiness,  was  explicitly 
enounced  when  our  government  was  established,  and  has 
never  been  formally  repudiated.  While  this  proposition 
is  hardly  equivalent  to  the  assertion  that  every  one  should 
justly  own  the  same  quantity  of  wealth,  it  is  declared 
to  mean  that  every  one  should  have  the  same  opportunity 
to  acquire  wealth  —  which  will  be  found  usually  to  mean 
opportunity  to  acquire  the  same  amount  of  wealth.  In 
fact,  it  is  urged,  the  right  of  property,  either  in  itself  or 
by  its  excessive  enlargement,  precludes  equality  of  oppor- 
tunity in  the  pursuit  of  happiness,  of  liberty,  even  of  life 
itself.  Nearly  the  whole  of  the  surface  of  the  earth  is 
owned  by  a  comparatively  small  number  of  individuals, 


LIMITATIONS  OF  PROPERTY  25 

while  most  material  things  are  likewise  in  their  possession. 
The  right  to  live  has  little  value  without  the  means  of 
living,  nor  is  the  right  to  pursue  happiness  of  practical 
use  to  those  who  cannot  secure  the  material  conditions  on 
which  happiness  depends.  The  complaint  has  been  for- 
mulated a  thousand  times,  but  never  more  clearly  than  by 
Louis  Blanc,  half  a  century  ago,  when  he  declared  that  the 
only  right  of  the  poor  man,  the  right  to  work,  amounts  to 
little  more  than  a  permission  to  do  so  if  he  can  find  any 
one  to  employ  him.1 

This  view  of  property  is  undoubtedly  impressive  when 
it  is  first  presented,  and  it  is  only  when  we  reflect  on  the 
enormously  increased  opportunities  for  work  which  civi- 
lization has  brought,  that  we  see  that  it  does  not  corre- 
spond with  actual  conditions.  There  is,  indeed,  nothing 
modern  in  such  complaints;  they  appear  in  the  records 
of  the  "  dawn  of  history. "  There  is  no  reason  to  suppose 
that  they  will  not  be  heard  till  the  end  of  time,  for  we 
can  neither  conceive  an  equal  distribution  of  goods  as 
actually  carried  out,  nor  imagine  how  it  could  be  main- 

1  "All  around  him  he  finds  the  soil  preoccupied.  Can  he  cultivate 
the  earth  for  himself?  No;  for  the  right  of  the  first  occupant  has  be- 
come a  right  of  property.  Can  he  gather  the  fruits  which  the  hand  of 
God  ripens  on  the  path  of  man?  No;  for,  like  the  soil,  the  fruits  have 
been  appropriated.  Can  he  hunt  or  fish?  No;  for  that  is  a  right  which 
is  dependent  upon  the  government.  Can  he  draw  water  from  a  spring 
enclosed  in  a  field?  No;  for  the  proprietor  of  a  field  is,  in  virtue  of  his 
right  to  the  field,  proprietor  of  the  fountain.  Can  he,  dying  of  hunger 
and  thirst,  stretch  out  his  hands  for  the  charity  of  his  fellow-creatures? 
No ;  for  there  are  laws  against  begging.  Can  he,  exhausted  by  fatigue 
and  without  a  refuge,  lie  down  to  sleep  upon  a  pavement  of  the  streets? 
No ;  for  there  are  laws  against  vagabondage.  .  .  .  What,  then,  can  the 
unhappy  man  do?  He  will  say,  'I  have  hands  to  work  with,  I  have  in- 
telligence, I  have  youth,  I  have  strength;  take  all  this,  and  in  return 
give  me  a  morsel  of  bread.'  This  is  what  the  working  men  do  say.  But 
even  here  the  poor  man  may  be  answered,  '  I  have  no  work  to  give  you.' 
What  is  he  to  do  then?" 


26  THE  METHODS  OF  TAXATION 

tained  were  it  ever  effected.1  We  must  assume  that  there 
will  always  be  honest,  industrious,  and  prudent  men,  as 
well  as  those  who  are  vicious,  indolent,  and  improvident; 
and  it  is  quite  certain  that  the  latter  class  will  always 
complain  that  their  lack  of  comfort  is  due  to  the  unjust 
institutions  of  society.  We  cannot  give  hearing  to  every 
one  who  calls  on  the  name  of  justice,  merely  because  of 
that  invocation;  for  the  authors  of  the  most  flagrantly 
dishonest  schemes  insist  that  they  are  just. 

Nor  can  it  be  admitted  that  complaints  of  the  unequal 
distribution  of  wealth  are  now  so  reasonable  as  they  have 
often  been  in  the  past.  However  gross  the  inequalities, 
the  common  people  are,  on  the  whole,  raised  much  above 
the  miserable  level  of  their  forefathers,  and  extreme  pov- 
erty is  now  usually  connected  with  moral  delinquency. 
The  claim  that  the  institution  of  property  is  intrinsic- 
ally unjust  and  must  be  abolished,  or  that  justice  de- 
mands the  equal  distribution  of  goods,  does  not  com- 
mand serious  attention.  Property  is  now  so  generally 
diffused  as  to  make  the  number  of  those  who  will  listen 
attentively  to  such  arguments  comparatively  insignifi- 
cant; and  the  tendency  to  such  diffusion  is  apparently 
growing. 

The  fact  that  universal  suffrage  has  prevailed  for  sev- 
eral generations  in  the  wealthier  states  of  our  union  is 
presumptive  evidence  that  the  right  of  property  is  not 
commonly  regarded  as  unjust.  Macaulay's  impressive 
warning  was  written  half  a  century  ago;  but  we  seem  to 

1  "Were  the  landlords  all  hanged  and  their  estates  given  to  the  poor, 
we  should  be  (economically)  much  happier  perhaps  for  the  space  of 
thirty  years.  But  the  population  would  be  doubled  then;  and  again 
the  hunger  of  the  unthrifty  would  burn  the  granary  of  the  industrious." 
T.  CARLYLE,  Life,  II,  p.  74. 


LIMITATIONS  OF  PROPERTY  27 

be  even  farther  from  the  predicted  catastrophe  than  we 
were  then.  His  reasoning,  with  that  of  other  sagacious 
observers  of  our  great  experiment,  was  sound  enough ;  but 
their  premises  have  not  been  substantiated.  It  will  be 
worth  while  to  review  these  premises,  in  order  to  ascertain 
what  opinions  concerning  justice  they  attribute  to  man- 
kind, and  whether  there  is  reason  to  expect  such  opinions 
to  prevail  hereafter.  Such  a  review  discloses  the  appre- 
hension, amounting  in  many  instances  to  an  assumption, 
that  if  the  suffrage  were  universal  the  poor  would  control 
the  government  and  use  it  to  confiscate  the  property  of 
the  rich.  The  case  was  well  stated  by  Webster,  in  his 
Plymouth  oration,  delivered  in  1820. 

"  The  freest  government,"  he  declared,  "  if  it  could  exist, 
would  not  be  long  acceptable,  if  the  tendency  of  the  laws 
were  to  create  a  rapid  accumulation  of  property  in  few 
hands,  and  to  render  the  great  mass  of  the  population 
dependent  and  penniless.  .  .  .  Universal  suffrage,  for  ex- 
ample, could  not  long  exist  in  a  community  where  there 
was  great  inequality  of  property.  ...  In  the  nature  of 
things,  those  who  have  not  property  and  see  their  neigh- 
bors possessing  much  more  than  they  think  them  to  need, 
cannot  be  favorable  to  laws  made  for  the  protection  of 
i  property.  When  this  class  becomes  numerous  it  grows 
climorous.  It  looks  on  property  as  its  prey  and  plunder, 
anl  is  naturally  ready,  at  all  times,  for  violence  and  revo- 
luton.  .  .  .  The  true  principle  of  a  free  and  popular 
government  would  seem  to  be,  so  to  construct  it  as  to 
give  to  all,  or  at  least  to  a  very  great  majority,  an  interest 
in  ite  preservation ;  to  found  it,  as  other  things  are  founded, 
on  mm's  interest." 

premise  or  assumption,  it  seems,  of  those  who  were 


28  THE  METHODS  OF  TAXATION 

alarmed  at  the  prospective  consequences  of  universal  suf- 
frage, was  the  existence  of  a  majority,  or  a  very  large 
minority,  of  citizens  without  property.  But,  in  fact,  Web- 
ster's condition  has  been  complied  with.  In  our  large 
cities,  it  is  true,  the  great  majority  own  no  real  property ; 
but  through  their  deposits  in  savings  banks  and  insurance 
companies  of  various  kinds,  as  well  as  through  direct 
ownership  of  personalty,  they  are  substantially,  and  to  a 
large  extent  consciously,  interested  in  the  preservation 
of  property.  Even  those  who  are  entirely  dependent  on 
their  wages  are  not  altogether  unaware  that  wages  might 
cease  if  property  were  overthrown,  and  are  to  that  extent 
intelligently  interested  in  maintaining  it;  it  is,  in  fact, 
"founded  on  men's  interest."  If  the  inequalities  of 
wealth  cannot  be  removed  without  destroying  this  insti- 
tution, the  rich  seem  to  have  no  present  need  to  fear.  We 
shall  not,  as  the  extreme  communists  desire,  abolish  both, 
but  preserve  both. 

Still,  we  are  evidently  not  confined  to  this  alternative. 
Dissatisfaction  with  extreme  inequalities  of  property  is 
not  the  same  thing  as  dissatisfaction  with  property  itself, 
The  former  feeling  not  only  prevails  among  the  ignorant 
poor,  but  also  permeates  the  educated  classes,  and  is  not 
unknown  even  among  the  rich.  Without  conceding  tie 
claims  supported  under  the  names  of  communism,  or  col- 
lectivism, or  socialism,  we  cannot  ignore  the  existence  of 
a  body  of  doctrine  of  this  tendency,  elaborated  by  men  of 
ability,  and  by  no  means  without  the  use  of  ratimal 
methods.  The  conclusion  seems  unavoidable  that  some 
modifications  of  the  right  of  property  are  universally,  or 
at  least  with  some  approach  to  unanimity,  admitted  to  be 
ideally  just,  even  if  not  practically  attainable.  To  uider- 


LIMITATIONS  OF  PROPERTY  23 

stand  the  present  state  of  public  opinion  it  seems  neces- 
sary to  review  the  arguments  commonly  employed  in  the 
past  to  justify  this  right,  and  to  test  their  validity  ac- 
cording to  the  standards  of  justice  now  recognized.  We 
must  know  something  of  the  origin  and  nature  of  property 
before  we  can  answer  the  question  how  it  can  be  altered 
without  wrong. 

Every  attempt  at  such  alteration,  it  might  almost  be 
said,  has  been  strenuously  and  even  violently  opposed,  on 
the  ground  that  property  is  something  sacred.  The  con- 
notation of  this  term  is  extremely  vague ;  but  as  commonly 
used  it  seems  to  imply  that  rights  of  property  are  unal- 
terable without  the  consent  of  their  possessors.  We  know, 
however,  as  a  matter  of  fact  that  alterations  have  been 
incessantly  made  in  the  past;  and,  as  we  have  observed, 
no  one  contends  that  such  a  continuous  process  has  been 
throughout  unjust.  There  seem,  indeed,  to  be  no  rights 
that  are  in  any  strict  sense  unalienable;  nor  do  we  at- 
tain any  additional  sanction  by  substituting  the  term 
"  natural."  It  is  true  that  until  a  comparatively  recent 
period  the  doctrine  of  "  natural  rights  "  was  much  relied 
on  by  the  philosophers  who  undertook  to  explain  the  in- 
stitution of  property.  Modern  criticism,  however,  has 
made  it  evident  that  our  knowledge  is  not  really  advanced 
by  appealing  to  this  doctrine.  In  fact  the  word  "  natural  " 
is  so  ambiguous  as  to  aggravate,  and  even  to  arouse,  con- 
troversies over  a  subject  intrinsically  contentious  and 
obscure. 

In  common  speech  any  right  seems  to  be  called  natural 
when  it  is  universally  recognized  and  long  established,  and 
is  therefore  regarded  as  normal  in  contrast  with  what  is 
exceptional.  But  the  term  is  also  applied  to  such  rights 


30  THE  METHODS  OF  TAXATION 

as  are  supposed  to  have  existed  in  the  primitive  state  of 
man,  as  well  as  to  those  which  would  exist  in  an  ideal 
state  of  society.  In  the  former  view,  the  existence  of  a 
right  proves  its  justice ;  hence  the  "  sacredness  "  of  vested 
rights,  and  the  doctrine  crudely  expressed  in  the  maxim 
"  Whatever  is,  is  right."  But  in  the  latter  view  the  jus- 
tice of  an  established  or  vested  right  is  to  be  determined 
not  by  the  fact  of  its  existence,  but  by  its  conformity 
to  an  ideal,  whether  that  ideal  be  referred  to  the  past 
or  to  the  future.  The  distinction  is  clearly  stated  by 
Sidgwick : 

"  For,  from  one  point  of  view,  we  are  disposed  to  think 
that  the  customary  distribution  of  rights,  goods,  and  privi- 
leges, as  well  as  burdens  and  pains,  is  natural  and  just, 
and  that  this  ought  to  be  maintained  by  law,  as  it  usually 
is;  while  from  another  point  of  view,  we  seem  to  recog- 
nize an  ideal  system  of  rules  of  distribution  which  ought 
to  exist,  but  perhaps  have  never  yet  existed,  and  we  con- 
sider laws  to  be  just  in  proportion  as  they  conform  to  this 
ideal."  * 

The  two  views  are  obviously  divergent;  and  the  result- 
ing ambiguity  of  the  term  "  natural "  is  so  confirmed  as 
to  make  it  desirable  to  limit  its  use.  When  it  is  necessary 
to  employ  it,  it  seems  better,  on  account  of  the  great  in- 
definiteness  of  the  ideal  sense,  to  call  that  "natural" 

1  fit  is  characteristic  of  an  unprogressive  society  that  in  it  these  two 
points  of  view  are  indistinguishable ;  the  Jural  Ideal  absolutely  coincides 
with  the  Customary,  and  social  perfection  is  imagined  to  consist  in  the 
perfect  observance  of  a  traditional  system  of  rules."  SIDGWICK,  Methods 
of  Ethics,  Book  III,  Chap.  V,  p.  2.  Compare  Maine's  assertion  "that 
much  the  greatest  part  of  mankind  nas  never  shown  a  particle  of  desire 
that  its  civil  institutions  should  be  improved,  since  the  moment  when 
external  completeness  was  first  given  to  them  by  their  embodiment  in 
some  permanent  record." 


LIMITATIONS  OF  PROPERTY  31 

which  has  been  so  long  established  as  to  have  become 
customary  and  legal.  But  the  fact  that  we  speak  of  bad 
customs  and  unjust  laws  proves  that  what  we  properly  call 
a  natural  right  does  not  necessarily  commend  itself  to  our 
consciences,  although  we  may  not  perceive  how  it  can  be 
rightfully  altered.  For  no  change  in  the  law  of  property 
can  be  made  without  affecting  unfavorably  the  condition 
of  some  members  of  the  community,  and  these  persons, 
if  they  have  been  guilty  of  no  offense  in  acquiring  their 
property,  may  reasonably  complain  of  injustice  when  they 
are  deprived  of  it.  The  fact  that  the  condition  of  other 
persons  is  improved  by  this  change  in  the  law  has,  strictly 
speaking,  nothing  to  do  with  relieving  this  injustice ;  for, 
if  those  who  suffer  have  done  no  wrong  to  those  who  are 
benefited,  they  cannot  be  justly  charged  with  the  cost  of 
this  benefit,  and  to  compel  them  to  bear  it  we  call  an 
injury. 

Hence  it  seems  that,  while  our  consciences  would  of 
course  approve  an  ideally  perfect  system  of  distribution, 
could  it  be  revealed  to  us,  they  would  revolt  at  the  conse- 
quences of  any  attempt  to  realize  it  in  practice.  And  this 
raises  the  question  whether  a  system  that  is  unattainable 
is  properly  to  be  regarded  as  an  ideal  system;  for  while 
a  young  man  may  be  indirectly  benefited  by  following 
Emerson's  advice,  "  Hitch  your  wagon  to  a  star,"  legisla- 
lation  on  this  plan  would  probably  be  disastrous.  Progress 
is  retarded  by  wasting  energy.  One  who  tries  to  lift  a 
weight  beyond  his  strength  exhausts  himself  without  ac- 
complishing anything  toward  his  purpose.  In  practical 
affairs,  and  especially  in  political -affairs,  attainability  must 
ordinarily  be  characteristic  of  any  ideal.  Absolute  justice 
is  not  satisfied  by  partial  application.  To  apply  an  ideal 


32  THE  METHODS  OF  TAXATION 

standard  only  in  certain  cases,  or  to  a  limited  extent,  may 
aggravate  injustice  rather  than  remove  it.1 

While  this  antinomy  must  evidently  be  disclosed  in  a 
progressive  community,  the  fact  that  progress  seems  normal 
in  modern  states  shows  that  in  practice  the  difficulty  is 
overcome  or  ignored.  Solviter  ambulando.  Legislation 
exhibits  a  continuous  series  of  compromises  between  the 
forces  of  conservatism  and  progress,  and  in  these  com- 
promises we  shall  expect  to  find  some  common  qualities  or 
principles.  The  conservative  is  compelled  to  recognize 
some  other  ideal  than  the  mere  maintenance  of  present 
conditions;  the  reformer  must  accept  something  short  of 
ideal  perfection.  No  doubt  extreme  measures  are  often 
adopted ;  but  this  implies  that  they  are  regarded  as  unjust 
by  a  large  part  of  the  community,  and  are  therefore  not 
apt  to  be  permanent.  They  work  with  so  much  friction 
as  to  defeat  their  own  object,  and  such  equilibrium  as  they 
produce  is  dangerously  unstable.  ~No  ideal  can  be  real- 
ized in  a  house  divided  against  itself;  justice  cannot 
prevail  in  the  midst  of  discord.  It  is  true  that  no  com- 
promise, even  if  called  successful,  can  seem  to  either  party 
to  conform  perfectly  to  justice ;  but  it  may  be  accepted  by 
both  as  the  closest  possible  approximation  thereto,  because 
no  more  will  be  yielded  by  one  side,  no  less  insisted  on  by 
the  other. 


*  Governments,  for  example,  pay  some  of  their  employees  higher 
wages  than  are  paid  by  private  persons,  with  the  avowed  purpose  of 
establishing  an  ideal  rate  of  compensation  which  other  employers  will 
be  led  to  imitate.  But  as  the  industrial  operations  of  governments  are 
usually  carried  on  without  regard  to  resulting  deficiencies,  while  private 
employers  must  make  a  profit  or  be  ruined,  and  as  the  revenue  of  gov- 
ernment is  subtracted  from  that  of  private  employers  or  their  employees, 
the  policy  tends  to  defeat  its  ostensible  purpose  and  to  intensify  the  in- 
justice which  it  professes  to  remove. 


LIMITATIONS  OF  PROPERTY  33 

Now  we  find  this  common  quality  of  compromises,  or 
what  we  may  call  the  regulative  principle  of  progress, 
explicitly  recognized  in  our  jurisprudence,  and  formally 
stated  in  our  constitutions.  Private  property,  it  is  de- 
clared, shall  not  be  taken  for  public  use  without  just  com- 
pensation, which  is  generally  understood  to  mean,  and 
sometimes  defined  as,  a  pecuniary  equivalent.  This  prin- 
ciple appears  on  examination  to  be  consistent  with  the 
doctrine  that  men  should  have  equal  opportunities  to  ac- 
quire wealth.  No  doubt  the  condemnation  of  property 
for  public  use  results  temporarily  in  giving  advantages 
to  a  small  number  of  persons  at  the  expense  of  the  rest. 
But  this  gain  may  be,  what  it  is  usually  asserted  to  be, 
only  the  removal  of  obstacles  which  have  hindered  these 
persons  from  enjoying  that  equality  of  opportunity  to 
which  they  are  justly  entitled;  and  it  is  supposed  to 
result  in  a  permanent  gain  of  this  kind  to  the  public  at 
large.  When  a  new  highway  is  opened  it  must  be  of 
especial  convenience  to  a  few ;  but  they  may  have  previ- 
ously contributed  to  the  cost  of  other  highways  from 
which  they  have  derived  no  advantage,  and  eventually  the 
new  road  should  facilitate  general  commerce.  No  doubt 
the  compensation  awarded  is  frequently  imperfect ;  money 
may  not  console  a  man  for  the  loss  of  an  ancestral  home 
by  condemnation  proceedings,  any  more  than  payment  by 
an  insurance  company  will  reconcile  him  to  its  destruction 
by  fire.  But  as  men  build  with  the  knowledge  that  fire 
may  destroy  the  work  of  their  hands,  so  they  acquire  prop- 
erty with  notice  that  their  title  is,  as  it  always  has  been, 
subject  to  the  right  of  eminent  domain. 

This  principle  seems  to  be  generally  accepted  as  almost 
self-evident,  and  its  history  shows  that  it  is  permanently 

3 


34  THE  METHODS  OF  TAXATION 

satisfactory  to  mankind  on  rational  grounds.  We  might 
therefore  recognize  it  as  fundamentally  just,  were  it  not 
for  the  objection,  often  very  strenuously  urged,  that  when 
property  has  been  unjustly  acquired,  the  public  may  justly 
take  it  without  compensation.  Now  this  evidently  cannot 
refer  to  the  illegal  acquisition  of  wealth ;  for  what  is  ille- 
gally acquired  does  not  become  the  property  of  the  pos- 
sessor, but  belongs  to  the  individual  from  whom  it  was 
taken,  not  to  the  public.  It  follows  that  the  unjust  ac- 
quisition must  be  a  legal  acquisition,  and  the  contention 
is  therefore  that  laws  permitting  the  acquisition  of  some 
forms  of  property  are  unjust,  and  must  be  overthrown  or 
disregarded  without  compensating  those  who  are  thereby 
deprived  of  their  possessions.  Thus  it  is  maintained  that 
laws  recognizing  property  in  human  beings  were  justly 
abolished  in  this  country  without  any  pretense  of  compen- 
sation to  the  slaveholders  of  the  Southern  States. 

The  emancipation  of  the  slaves,  however,  was  an  act  of 
war;  and  we  find  that  principles  of  justice  have  very 
slight  application  when  bodies  of  men  are  struggling  to 
destroy  each  other's  lives  and  property.  Before  war  ac- 
tually broke  out,  it  must  be  remembered,  the  slave  owners 
might  have  received  compensation  had  they  been  willing 
to  abandon  the  institution  of  slavery;  and,  under  the  cir- 
cumstances, their  refusal  was  practically  a  waiver  of  their 
constitutional  right.  But  whether  we  can  construct  an 
ethical  code  by  which  the  conduct  of  men  engaged  in  mutual 
s]aughter  is  regulated,  or  not,  such  a  code  would  evidently 
be  useless  as  a  guide  to  men  living  together  as  friends  in 
a  peaceful  society.  Inter  arma  silent  leges;  but  under 
normal  conditions  laws  must  be  altered  by  law  and  not 
by  violence.  And,  as  we  have  seen,  a  method  of  alter  a- 


LIMITATIONS  OF  PROPERTY  35 

tion  has  been  devised  under  which  the  inevitable  injury 
caused  by  any  alteration  is  reduced  to  a  minimum. 

This  conclusion  is  not  affected  by  our  recognizing  the 
right,  or  even  the  necessity,  of  revolution.  The  conscience 
of  the  individual  man  is  for  him  the  supreme  authority, 
and  if  it  forbid  him  to  obey  a  law,  he  may  rightfully  re- 
fuse obedience.  Thus  many  conscientious  persons  declined 
to  obey  the  constitutional  mandate  to  return  fugitive  slaves 
to  their  owners,  and  sometimes  actively  resisted  it.  They 
were  in  effect  rebels;  they  apparently  initiated  the  revo- 
lution which  finally  extinguished  slavery,  and  they  may 
be  thought  to  have  acted  justly,  because,  it  is  commonly 
said,  the  event  justified  them.  But  even  in  the  case  of 
perhaps  the  most  beneficent  revolution  that  has  ever  taken 
place,  we  can  justify  violence  only  on  the  ground  that 
peaceful  methods  were  unavailable.  The  end  being  to 
abolish  property  in  human  beings,  the  normal  course  of 
reform  would  have  been  to  employ  the  means  provided  by 
the  constitution;  and,  had  not  the  slave-holders  resorted 
to  violence,  we  may  infer,  from  the  example  of  other  move- 
ments of  emancipation,  that  this  course  would  have  event- 
ually been  taken.  In  this  view  the  revolution  was  not 
the  act  of  the  antislavery  party,  but  of  the  pro-slavery 
party,  and  it  is  irrelevant  to  inquire  whether  the  opponents 
of  slavery  were  justified  in  their  course. 

Even  in  the  case  of  what  are  called  successful  revolu- 
tions, we  must  always  ask  if  the  beneficent  results  could 
not  have  been  better  obtained  by  peaceful  methods;  and 
if  it  clearly  appears  that  they  could  have  been,  we  do  not 
consider  the  revolution  justified.  Unsuccessful  revolutions, 
of  course,  are  even  less  justifiable;  although  we  must 
admit  that  the  blood  of  the  martyrs  may  be  the  seed  of 


36  THE  METHODS  OF  TAXATION 

the  church,  and  beware  of  considering  temporary  results 
alone.  The  scope  of  this  inquiry,  however,  does  not  re- 
quire us  to  decide  on  the  responsibility  of  individuals,  but 
on  the  justice  of  organized  and  violent  resistance  to  law. 
But  this  is  civil  war ;  it  means  that  rulers  will  try  to  kill 
their  subjects,  and  subjects  their  rulers.  It  is  perhaps 
conceivable  that  human  happiness  is  promoted  by  opera- 
tions of  this  kind,  at  least  when  we  think  of  some  cruel 
despotisms;  but  arguments  in  support  of  this  conclusion 
generally  ignore  what  might  have  happened  had  suitable 
measures  been  employed  to  preserve  peace.  All  war  neces- 
sarily inflicts  terrible  suffering  on  many  human  beings 
guiltless  of  moral  delinquency;  but  civil  war  is  so  pecu- 
liarly cruel  and  demoralizing  as  to  make  it  difficult  to 
believe  that  the  existence  of  any  right  of  property  in 
material  things  can  cause  more  misery  than  such  a  remedy. 
Rights  of  property  existed  in  France  that  were  inde- 
fensible on  rational  grounds ;  but  it  has  been  demonstrated 
that  the  Revolution  was  caused,  not  by  this  injustice,  but 
by  the  intolerable  burden  of  a  mass  of  taxes  so  contrived 
as  to  make  productive  industry  impossible. 

Still,  it  may  be  contended,  the  provision  for  compensa- 
tion may  be  revoked  by  constitutional  methods.  It  seems 
to  be  supported  by  common  sense,  because  it  has  the  pres- 
tige given  by  being  expressed  in  the  constitution;  but  if 
it  be  clearly  seen  that  it  perpetuates  gross  abuses,  com- 
mon sense  may  reject  it.  And  if  it  should  prove  that 
much  the  greater  number  of  the  people  had  taken  this 
view,  the  standard  that  we  have  adopted  would  require 
us  to  admit  its  justice.  But  we  find  no  evidence  leading 
us  to  believe  that  men  would  generally  say  that  private 
property  might  be  taken  by  government  without  compen- 


LIMITATIONS  OF  PROPERTY  37 

sation.  This  would  be  to  abolish  property  as  a  legal 
institution,  which  we  have  seen  reason  to  think  will  not 
take  place.  ~No  doubt  great  numbers  of  men  have  sub- 
mitted to  tyrants;  but  this  does  not  prove  that  they 
thought  it  just  that  they  should  be  deprived  of  their  pos- 
sessions by  their  government.  Nor  does  the  case  seem 
to  be  altered  if  we  say  that  men  may  be  deprived,  not  of 
all,  but  of  certain  kinds  of  legally  acquired  property  with- 
out compensation.  For  this  is  not  to  say  that  the  law 
may  not  declare  that  after  a  given  time  a  certain  kind 
of  property  shall  cease  to  be  recognized;  this  may  be 
unwise,  but  as  it  applies  to  all  members  of  the  community 
we  do  not  call  it  unjust.  It  is  to  say  that  certain  indi- 
viduals who  have  acquired  wealth  on  the  faith  of  the  as- 
surance given  by  the  law  that  such  wealth  shall  be  pro- 
tected, and  who  have  violated  no  law,  shall  find  that 
assurance  withdrawn  and  that  protection  withheld.  The 
codes,  both  of  law  and  of  ethics,  condemn  such  proceed- 
ings as  unjust  for  reasons  which  are  fundamental  in  our 
civilization. 

These  reasons  appear  to  depend  on  two  leading  prin- 
ciples :  first,  that  men  may  justly  own  the  product  of  their 
labor,  and  second,  that  they  may  be  justly  compelled  to 
keep  their  promises.  The  two  principles  are  clearly  dis- 
tinguishable, but  in  describing  their  application  writers 
have  so  often  confounded  them  as  to  make  it  difficult  to 
preserve  the  distinction;  and  in  this  way  the  legal  right 
conferred  by  prescription  has  come  to  be  asserted  as  also 
a  fundamental  principle  of  justice.  The  true  origin  of 
these  principles  will  be  disclosed  if  we  continue  our  ex- 
amination of  the  methods  employed  by  philosophers  in 
explaining  and  justifying  the  right  of  property.  These 


38  THE  METHODS  OF  TAXATION 

methods  will  be  found  to  have  changed  somewhat  as  civil- 
ization has  progressed,  but  discarding  the  mutable  ele- 
ments, we  may  hope  to  obtain  a  permanent  residuum  of 
truth. 

The  earlier  writers  on  property,  who  were  prone  to 
appeal  to  "  nature,"  usually  regarded  priority  of  occu- 
pation as  conferring  or  constituting,  a  natural  right;  and 
it  has  certainly  played  an  important  part  in  denning  the 
territorial  jurisdictions  of  several  of  the  more  powerful 
states.  The  doctrine  was  apparently  first  elaborated  by  the 
Roman  publicists  for  the  purpose  of  fortifying  the  defec- 
tive title  by  which  the  nobles  held  possession  of  the  public 
lands;  but  it  came  to  have  a  very  wide  application. 
Grotius  lays  it  down  that  prior  occupation  of  the  soil, 
"  by  the  tacit  consent  of  mankind,"  gave  a  right  to  its 
use,  and  as  the  use  was  prolonged,  to  its  substance.  The 
violent  disputes  among  the  European  powers  over  discov- 
eries of  whole  continents  lying  outside  of  Christendom 
show  that  the  consent  of  mankind  was  by  no  means  a 
matter  of  course;  and  the  application  of  the  principle 
was  palpably  absurd.  It  may  confer,  as  Maine  says,  enor- 
mous advantages  merely  as  the  consequence  of  a  piece  of 
good  luck,  and  its  connection  with  the  idea  of  justice  is 
altogether  adventitious.1 

1  "  In  applying  to  the  discovery  of  new  countries  the  same  principles 
which  the  Romans  had  applied  to  the  finding  of  a  jewel,  the  Publicists 
forced  into  their  service  a  doctrine  altogether  unequal  to  the  task  ex- 
pected from  it.  Elevated  into  extreme  importance  by  the  discoveries  of 
the  great  navigators  of  the  15th  and  16th  centuries,  it  raised  more  dis- 
putes than  it  solved.  .  .  .  Moreover,  the  principle  itself,  conferring  as 
it  did  such  enormous  advantages  as  the  consequence  of  a  piece  of  good 
luck,  was  instinctively  mutinied  against  by  some  of  the  most  adven- 
turous nations  in  Europe,  the  Dutch,  the  English,  and  the  Portuguese. 
.  .  .  Bentham  was  so  struck  with  the  confusion  attending  the  applica- 
tion of  the  legal  principle  that  he  went  out  of  his  way  to  eulogize  the 


LIMITATIONS  OF  PROPERTY  39 

Much  learning  and  ingenuity  have  been  expended  both 
in  attacking  and  defending  this  principle;  but  it  origi- 
nally amounted  only  to  an  expression  of  a  rule  of  expe- 
diency. Occupation  gave  title  not  because  of  any  preva- 
lent conception  of  natural  justice,  but  because  men's 
quarrels  had  to  be  terminated.  The  earliest  tribunals  were 
not  constituted  to  apply  laws  but  to  preserve  order.  The 
easiest,  and  in  that  sense  the  most  natural,  course  for  a 
judge  to  follow,  when  several  persons  appeared  before 
him  claiming  title  to  the  same  thing,  was  to  recognize  the 
one  that  had  possession  as  the  owner ;  and  the  maxim  Beati 
Possidentes  is  the  ultimate  legal  basis  of  the  tenure  of 
the  earth  by  its  occupants.  Like  other  animals,  men  have 
appetites  that  must  be  gratified  with  the  fruits  which  the 
earth  affords.  They  would  starve  without  them,  and  they 
appropriate  them  in  order  to  satisfy  their  hunger.  Hav- 
ing seized  them,  like  other  animals  they  resist  with  force 
attempts  to  deprive  them  of  their  possessions;  and  it  was 
perhaps  originally  the  chief  function  of  civil  government 
to  prevent  such  interference.  A  law  recognizing  occu- 
pancy as  conferring  a  right  of  property  seems  therefore 
of  the  nature  of  a  statute  of  repose ;  like  the  rules  limiting 
the  time  within  which  actions  may  be  brought,  it  "  quiets 
title."  Strictly  speaking,  however,  it  asserts  nothing  as 
to  the  justice  of  any  title  which  it  supports;  although  it 

famous  Bull  of  Pope  Alexander  the  Sixth,  dividing  the  undiscovered 
countries  of  the  world  between  the  Spaniards  and  the  Portuguese  by  a 
line  drawn  one  hundred  leagues  west  of  the  Azores;  and,  grotesque  as 
his  praises  may  appear  at  first  sight,  it  may  be  doubted  whether  the 
arrangement  of  Pope  Alexander  is  absurder  in  principle  than  the  rule 
of  Public  law,  which  gave  half  a  continent  to  the  monarch  whose  ser- 
vants had  fulfilled  the  conditions  required  by  Roman  jurisprudence  for 
the  acquisition  of  property  in  a  valuable  object  which  could  be  covered 
by  the  hand."  MAINE,  Ancient  Law,  Chap.  VIII. 


40  THE  METHODS  O^  TAXATION 

may  imply  that  justice  is  promoted  by  requiring  whoever 
would  question  such  titles  to  Overcome  the  presumption 
in  their  favor  established  by  tlieir  mere  existence. 

We  must  admit,  therefore,  t,\iat  however  indispensable 
the  principle  that  occupancy  r  gives  title  may  be  in  the 
practical  administration  of  justice,  it  gives  too  much  im- 
portance to  mere  priority  p^nd  good  fortune  to  satisfy  the 
moral  sense  of  mankind.  The  accident  of  time  cannot  be 
of  the  essence  of  justf.ee;  and  hence  philosophers  have 
usually  maintained  tnat  the  expenditure  of  labor  is  a 
fundamental  requisite  in  establishing  a  right  of  property. 
Thus  when  they  speak  of  occupancy  as  conferring  title, 
they  assume  that  labor  is  added.  As  Locke  says,  the  labor 
of  a  man's  body  and  the  work  of  his  hands  are  properly 
his,  and  "  whatsoever  then  he  removes  out  of  the  state  that 
nature  hath  provided  and  left  it  in,  he  hath  mixed  his 
labor  with  and  joined  to  it  something  that  is  his  own,  and 
thereby  makes  it  his  property."  Evidently  in  these  ob- 
servations Locke  had  in  mind  the  case  of  a  savage  who 
had  plucked  fruit  from  a  tree,  or  taken  fish  from  a  stream, 
or  even  planted  a  piece  of  ground  for  the  purpose  of 
providing  himself  with  food.  The  thing  possessed  and 
the  labor  expended  on  it  are  indispensable  to  the  subsist- 
ence of  the  owner,  and  the  recognition  of  property  in  this 
form  seems  to  have  been  a  fundamental  condition  of  any 
advance  in  civilization,  as  without  it  perpetual  war  would 
prevail.  It  seems  necessary  also  to  extend  it  to  the  in- 
struments required  in  procuring  subsistence.  No  one 
would  be  at  the  pains  to  provide  himself  with  such  imple- 
ments if  he  could  have  no  security  in  the  use  of  them; 
"  if,  so  soon  as  he  walked  out  of  his  tent,  or  pulled  off  his 
garment,  the  next  stranger  who  came  by  would  have  a 


LIMITATIONS  ,JF  PROPERTY  41 

) 

right  to  inhabit  the  one  and  to  wear  the  other."  To  this 
extent,  at  least,  property  is  universally  recognized,  and 
we  may  adopt  as  fundamental  the  principle  that  he  who 
expends  labor  on  anything  unappropriated  that  is  neces- 
sary for  his  existence  is  thereby  justified  in  its  exclusive 
possession. 

To  this  principle  the  doctrine  that  justice  demands  that 
all  men  shall  have  equal  opportunity  to  acquire  wealth  iq 
necessarily  subordinate.  For  the  material  things  consti- 
tuting wealth  are  limited  in  quantity,  while  no  limit  can 
be  assigned  to  the  possible  number  of  men  except  the 
deficiency  of  food.  It  has  often  happened  in  the  past, 
and  sometimes  happens  to-day,  that  the  quantity  of  food 
procurable  by  a  community  has  not  been  enough  for  the 
subsistence  of  the  whole  population ;  and,  while  it  is  hard 
to  reconcile  such  conditions  with  Divine  justice,  we  do 
not  regard  it  as  unjust,  according  to  human  standards,  that 
those  who  have  provided  by  their  labor  so  much  food  as 
will  barely  suffice  to  keep  them  alive  should  use  it  for 
themselves,  even  if  their  neighbors  are  starving.  For,  as 
some  must  perish,  it  seems  unjust  that  it  should  be  those 
who  have  labored  and  been  provident,  rather  than  those 
who  have  not.  The  parable  of  the  wise  and  foolish  vir- 
gins has  many  practical  applications.  So  when  a  ship- 
wreck occurs  the  capacity  of  the  life-boats  is  often  found 
insufficient.  The  boats  will  sink  if  all  the  passengers 
crowd  into  them ;  and  probably  no  one  would  contend  that 
justice  requires  all  to  be  drowned  because  all  cannot  be 
saved. 

These  illustrations,  however,  show  that  as  property  is 
regarded  as  just  because  it  is  necessary  to  support  life, 
so  the  justice  of  the  ownership  of  more  than  is  necessary 


*   X 

42  THE  METHODS  OF  TAXATION 

must  be  otherwise  established.  We  cannot  admit  that 
occupancy  nnd  the  expenditure  of  labor  in  providing  food 
to  a  greater  extent  than  is  required  to  support  life  give 
a  self -evidently  valid  title  to  the  surplus;  at  least  while 
other  mien  equally  willing  to  labor  are  starving.  Failure 
to  notice  this  qualification  has  led  many  writers  to  state 
thpj  right  of  property  in  the  results  of  labor  too  absolutely. 
,1hus  Mill  gives  the  following  definition :  "  The  institu- 
tion of  property,  when  limited  to  its  essential  elements, 
consists  in  the  recognition  in  each  person,  of  a  right  to 
the  exclusive  disposal  of  what  he  or  she  have  produced 
by  their  own  exertions,  or  received  either  by  gift  or  by 
fair  agreement,  without  force  or  fraud,  from  those  who 
produced  it.  The  foundation  of  the  whole  is  the  right 
of  producers  to  what  they  themselves  have  produced." 
He  adds  that  bequest  is  one  of  the  attributes  of  property; 
"  the  ownership  of  a  thing  cannot  be  looked  upon  as  com- 
plete without  the  power  of  bestowing  it,  at  death  or  during 
life,  at  the  owner's  pleasure."  He  distinguishes,  however, 
the  capacity  of  making  bequests  from  that  of  taking  them, 
holding  it  no  interference  with  the  right  of  property  to 
limit  the  latter  capacity. 

The  same  doctrine  was  set  forth  by  the  late  Henry 
George  in  his  book,  "  Progress  and  Poverty  " ;  a  work 
which  deserves  notice  here  because  of  the  large  number  of 
persons  who  seem  to  have  been  favorably  impressed  with 
the  method  of  taxation  recommended  by  the  author.  He 
maintains,  after  Locke,  that  "  as  a  man  belongs  to  himself, 
so  his  labor  when  put  in  concrete  form  belongs  to  him. 
And  for  this  reason  that  which  a  man  makes  or  produces 
is  his  own,  as  against  all  the  world  —  to  enjoy,  or  to 
destroy,  to  use,  to  exchange,  or  to  give."  The  right  of 


LIMITATIONS  OF  PROPERTY  43 

unlimited  transfer  is  especially  emphasized :  "  Thus  there 
is  to  everything  produced  by  human  exertion  a  clear  and 
undisputable  title  to  exclusive  possession  and  enjoyment, 
which  is  perfectly  consistent  with  justice,  as  it  descends 
from  the  original  producer,  in  whom  it  vested  by  natural 
law." 

It  is  obvious  that  these  statements  involve  material  ex- 
tensions of  the  original  doctrine.  "  The  law  of  nature 
and  reason,"  as  Blackstone  says,  may  entitle  him  who 
works  to  the  fruits  of  his  labor,  so  far  as  the  satisfaction 
of  his  wants  is  concerned.  But  it  is  not  apparent,  as  we 
have  pointed  out,  that  a  man  becomes  entitled  to  an  un- 
limited quantity  of  material  things  by  virtue  of  labor  ex- 
pended on  them,  or  that  a  title  originally  just  continues 
with  unimpaired  validity  for  all  time.  For  the  quantity 
of  available  matter  is  limited;  and,  as  population  in- 
creases, many  substances  become  relatively  scarce.  When 
gold  was  first  discovered  in  California,  Mr.  George  informs 
us,  it  was  obtained  by  what  was  called  "  placer  mining," 
or  washing  the  grains  of  metal  out  of  the  gravel  in  which 
they  were  imbedded.  The  miners  in  each  district  fixed 
the  amount  of  ground  that  an  individual  could  take,  and 
the  device  is  said  by  this  writer  to  have  secured  substantial 
justice.  "  One  man  might  strike  an  enormously  rich  de- 
posit, and  others  might  vainly  prospect  for  months  and 
years,  but  all  had  an  equal  chance."  A  new  comer,  how- 
ever, might  find  all  the  available  ground  preoccupied, 
and  that  he  had  no  chance  at  all;  while  after  a  time 
all  the  accessible  gold  would  have  passed  into  private 
ownership.  Under  such  circumstances  good  luck  and 
priority,  rather  than  labor,  seem  to  be  the  foundation  of 
property. 


44  THE  METHODS  OF  TAXATION 

Substances  of  unstable  composition,  perishable  articles, 
as  they  are  called,  may  be  appropriated  without  question 
because  otherwise  they  will  be  useless,  but  durable  mate- 
rials are  affected  with  the  claims  of  future  generations. 
Of  some  of  these  materials  the  quantity  may  be  practically 
unlimited.  Population  will  perhaps  never  become  so  dense 
as  to  make  it  difficult  to  obtain  an  abundance  of  ordinary 
stone  or  clay.  The  supply  of  certain  things,  however,  is 
proved  to  be  relatively  deficient  by  the  value  which  they 
attain.  That  they  have  any  value  proves  some  degree  of 
scarcity;  and,  as  this  scarcity  becomes  more  appreciable, 
the  value  of  that  portion  of  the  substance  that  has  passed 
into  private  ownership  is  enhanced.  Under  the  unlimited 
right  of  transfer  asserted  in  the  passages  above  quoted  this 
portion  may  pass  into  the  hands  of  persons  who  did  not 
exist  when  it  was  produced,  and  who  performed  no  labor 
in  its  acquisition.  The  fact  that  labor  was  expended  in 
the  remote  past  by  ancestors  or  benefactors  does  not  of  itself 
cause  men  to  regard  as  just  the  title  of  the  possessor  of 
great  wealth,  toward  the  accumulation  of  which  he  has  not 
lifted  a  finger. 

It  is  evident  that  neither  of  the  writers  quoted  has 
sufficiently  considered  all  that  is  involved  in  asserting  an 
unlimited  right  of  transfer.  As  to  right  of  transfer  by 
bequest,  indeed,  Mill's  statements  seem  irreconcilable.  For 
we  cannot  say  that  a  man  has  perfect  liberty  in  giving, 
when  others  have  not  perfect  liberty  in  receiving.  Were 
this  true,  we  might  say  that  to  restrict  the  capacity  to  buy 
does  not  limit  the  power  to  sell,  —  a  conclusion  too  absurd 
to  deserve  attention.  The  difficulty  felt  by  Mill  is  not  con- 
fined to  transfers  by  bequest.  He  had  in  mind  the  acqui- 
sition of  great  estates  by  legatees  without  any  labor  on 


LIMITATIONS  OF  PROPERTY  45 

their  part;  but  the  same  result  may  appear  when  gifts 
are  made  by  the  living.  And  even  in  the  case  of  transfers 
for  a  valuable  consideration,  the  consideration  may  be  in- 
adequate; or,  as  we  have  seen,  the  value  of  the  object 
transferred  may  in  the  course  of  years  very  greatly 
increase. 

So  far  as  labor  justifies  property,  therefore,  the  right  to 
an  object  obtained  by  exchange  seems  to  be  limited  to  the 
same  extent  as  the  right  to  an  object  produced;  that  is, 
by  the  necessities  of  the  proprietor.  To  this  extent  we 
may  follow  the  older  writers,  and  say  that  the  right  to  hold 
by  exchange  whatever  has  become  the  subject  of  property 
is  derived  from  that  conferred  by  occupancy  and  labor, 
"  the  first  occupant  abandoning  what  he  had  occupied  by 
allowing  such  person  as  he  chose  to  take  his  place.  The 
second  and  every  later  occupant  being  in  occupation,  and 
no  one  being  concerned  to  question  the  possession  except 
those  who  had  permitted  it,  the  law  confirmed  the  bar- 
gain " ;  and  it  is  to  this  day  reluctant  to  allow  any  trans- 
fer made  with  due  formality  to  be  disturbed.  So  far  as 
the  law  is  concerned,  therefore,  we  might  say  that  all 
titles  are  based  on  occupancy,  original  or  derivative;  and 
justice,  in  the  legal  sense,  would  mean  little  more  than  the 
observance  of  the  rules  governing  transfers.  Nor  when 
we  consider  the  frightful  misery  of  those  peoples  whose 
governments  fail  to  apply  such  rules,  or  to  respect  titles 
acquired  in  conformity  to  them,  can  we  deny  that  there  is 
some  truth  in  this  view.  In  such  matters  the  experience 
of  all  nations  shows,  as  Adam  Smith  says,  that  a  very  con- 
siderable degree  of  inequality  is  not  near  so  great  an  evil 
as  a  small  degree  of  uncertainty. 

The  study  of  this  experience  brings  to  light  the  true 


46  THE  METHODS  OF  TAXATION 

reason  why  men  have  always  held  it  just  that  the  right  of 
property  in  things  obtained  by  transfer  should  be  recog- 
nized. The  whole  fabric  of  civilization  rests  on  this  right. 
]STo  progress  beyond  the  life  of  the  brutes  could  ever  have 
taken  place  without  it.  It  is  indispensable  to  what  Adam 
Smith  calls  the  division  of  labor,  which  is  the  source  of  all 
our  wealth.  There  is,  as  he  expressed  it,  in  human  nature 
a  certain  "  propensity  to  truck,  barter,  and  exchange  one 
thing  for  another,"  which  is  "  common  to  all  men,  and  to 
be  found  in  no  other  race  of  animals,  which  seem  to  know 
neither  this  nor  any  other  species  of  contracts."  Without 
the  recognition  of  this  species  of  contract,  society  could 
not  have  been  organized,  nor  law  developed;  nor  could 
peace  have  anywhere  prevailed.  As  the  life  of  the  in- 
dividual depends  on  his  having  property  in  what  he  has 
produced,  so  the  life  of  whole  communities  of  men  de- 
pends on  their  having  property  in  things  obtained  by 
exchange. 

As  Adam  Smith  showed  with  incomparable  power,  by 
means  of  such  property  the  sum  total  of  wealth,  and  there- 
fore the  average  wealth  of  every  one,  is  enormously  in- 
creased. Whatever  the  original  source  of  title,  nearly  all 
things  now  owned  have  come  into  their  owners'  possession 
by  exchange  or  transfer.  The  quantity  of  goods  consumed 
by  those  who  produce  them  is  comparatively  so  small  as  to 
make  it  hardly  an  exaggeration  to  say  that  everything  is 
produced  in  order  to  be  exchanged.  Most  things,  indeed, 
are  exchanged  many  times  before  they  are  finally  con- 
sumed. Services  having  no  tangible  embodiment  are  com- 
monly requited  by  some  "  material  equivalent,"  as  we  say, 
and  "  value  "  has  come  to  mean  value  in  exchange.  The 
advance  of  civilization  may  be  measured  by  the  removal 


LIMITATIONS  OF  PROPERTY  47 

of  hindrances  to  freedom  of  transfer,  and  nearly  every 
attempt  to  restrict  it  by  taxation  has  been  found  to  dimin- 
ish the  wealth  of  the  community  rather  than  to  increase 
the  revenue  of  the  sovereign.  Modern  industry  could  not 
be  carried  on  without  legal  recognition  of  this  right  of 
free  contract;  it  would  be  paralyzed  were  any  question  to 
exist  as  to  the  validity  of  the  title  to  things  obtained  by 
barter. 

No  doubt  the  weakness  or  necessity  of  one  party  to  an 
exchange  sometimes  gives  the  other  what  we  call  an  unfair 
advantage,  even  when  both  parties  are  competent  to  con- 
tract and  no  fraud  or  force  has  been  employed.  Indeed, 
bargains  of  the  largest  class,  those  in  which  poor  men  barter 
their  labor,  are  often  stigmatized  as  unjust,  on  the  ground 
that  laborers  are  compelled  by  their  poverty  to  accept  such 
terms  as  employers  choose  to  offer.  It  admits  of  no  ques- 
tion, however,  that  the  condition  of  the  poor  has  been 
bettered  as  liberty  of  contract  has  been  legalized ;  nor  can 
we  imagine  a  community  where  this  complaint  of  unfair- 
ness would  not  be  heard.  For,  ex  m  termini,  the  laborer 
is  not  a  capitalist,  and  the  very  fact  that  one  of  the 
parties  to  the  contract  of  hiring  possesses  accumulated 
wealth,  while  the  other  does  not,  constitutes  the  supposed 
unfairness. 

But  it  .seems  clear  that  if  wealth  gives  an  advantage  in 
this  bargain,  the  advantage  would  be  rather  increased  than 
diminished  by  whatever  made  the  bargain  more  difficult. 
The  prodigious  development  of  the  means  of  physical  trans- 
fer, and  the  incessant  endeavors  to  lessen  the  cost  of  trans- 
portation, imply  the  common  acceptance  of  freedom  of 
exchange  as  just;  and  in  spite  of  numerous  legal  restric- 
tions, modern  society  may  be  said  to  be  constituted  on  this 


48  THE  METHODS  OF  TAXATION 

principle.1  Hence  it  is  argued  that  the  apparent  injustice 
of  great  aggregations  of  wealth  in  the  hands  of  individual 
owners  is  an  inevitable  adjunct  of  progress,  and  that  if 
they  cannot  be  prevented  without  interfering  with  the  free- 
dom of  contract,  less  injustice  will  be  caused  by  tolerating 
them  than  by  attempting  to  prevent  them.  In  this  view, 
the  fact  that  a  few  men  acquire  great  wealth  is  a  conse- 
quence of  the  institutions  that  enable  the  mass  of  the  people 
to  acquire  wealth  at  all.  As  a  matter  of  fact,  those  who 
regard  great  estates  as  an  evil  have  generally  proposed  to 
regulate  the  disposition  rather  than  the  acquisition  of 
them ;  nor  are  men  anywhere  forbidden  to  own  more  than 
a  prescribed  quantity  of  wealth. 

If  property  in  things  obtained  through  transfer  is  just, 
it  is  evident  that  justice  requires  the  recognition  of  title 
by  prescription.  The  reasons  for  this  are  succinctly  stated 
by  Mill,2  and  need  not  be  enlarged  upon.  It  may  be  added, 

1  *'If  there  is  one  thing  which  more  than  another  public  policy  re- 
quires, it  is  that  men  of  full  age  and  competent  understanding  shall  have 
the  utmost  liberty  of  contracting,  and  that  their  contracts  when  entered 
into  freely  and  voluntarily  shall  be  held  sacred  and  shall  be  enforced  by 
courts  of  justice."  JESSEL,  M.  R. 

a  The  principle  of  individual  property  requires  "that  a  title,  after  a 
certain  period,  should  be  given  by  prescription.  According  to  the  fun- 
damental idea  of  property,  indeed,  nothing  ought  to  be  treated  as  such, 
which  has  been  acquired  by  force  or  fraud,  or  appropriated  in  ignorance 
of  a  prior  title  vested  in  some  other  person;  but  it  is  necessary  to  the 
security  of  the  rightful  possessors,  that  they  should  not  be  molested  by 
charges  of  wrongful  acquisition,  when  by  the  lapse  of  time  witnesses 
must  have  perished  or  been  lost  sight  of,  and  the  real  character  of  the 
transaction  can  no  longer  be  cleared  up.  Possession  which  has  not  been 
legally  questioned  within  a  moderate  number  of  years,  ought  to  be,  as 
by  the  laws  of  all  nations  it  is,  a  complete  title.  Even  when  the  acquisi- 
tion was  wrongful,  the  dispossession,  after  a  generation  has  elapsed,  of 
the  probably  bona  fide  possessors,  by  the  revival  of  a  claim  which  had 
been  long  dormant,  would  generally  be  a  greater  injustice,  and  almost 
always  a  greater  private  and  public  mischief,  than  leaving  the  original 
wrong  without  atonement.  It  may  seem  hard  that  a  claim,  originally 
just,  should  be  defeated  by  mere  lapse  of  time ;  but  there  is  a  time  after 


LIMITATIONS  OF  PROPERTY  49 

however,  that  barter  would  become  impossible  were  every 
new  owner  compelled  to  trace  the  title  of  whatever  he 
acquired.  While,  strictly  speaking,  no  title  can  be  acquired 
or  given  by  a  thief,  the  law  refuses  in  many  cases  to  allow 
the  title  of  one  who  purchases  in  good  faith  for  value  to 
be  questioned ;  and  the  nature  of  large  classes  of  personal 
property  is  such  as  to  make  this  rule  necessary.  To  compel 
every  one  who  received  a  coin  or  a  banknote  to  trace  the 
title  by  which  it  has  been  previously  held  before  he  could 
be  assured  that  he  had  a  right  to  hold  it,  would  be  uni- 
versally regarded  as  the  height  of  injustice.  In  such  cases 
immediate  title  by  prescription  is  evidently  a  necessity  of 
human  industry ;  and  the  case  of  land,  where  the  law  per- 
mits a  superior  title  to  be  asserted  against  an  innocent 
purchaser  for  value  within  a  certain  number  of  years,  does 
not  constitute  an  exception  to  the  principle.  For  the  pur- 
chase of  land  is  usually  a  .momentous  transaction,  implying 
deliberation,  as  well  as  careful  scrutiny  of  official  records, 
and  there  is  so  little  room  for  error  or  deception  that  some 
states  guarantee  against  all  attacks  the  title  of  a  purchaser 
who  has  observed  due  formalities.  Where  the  customary 
periods  of  limitation  prevail,  few  conveyancers,  perhaps, 
would  hesitate  to  say  that  more  injustice  is  caused  in 
practice  by  bringing  forward  titles  that  have  been  over- 
looked than  would  be  caused  by  precluding  them,  and  this 
opinion  is  confirmed  by  the  very  small  losses  incurred  by 
the  companies  that  insure  titles. 

which  (even  looking  at  the  individual  case,  and  without  regard  to  the 
general  effect  on  the  security  of  possessors),  the  balance  of  hardship  turns 
the  other  way.  With  the  injustices  of  men,  as  with  the  convulsions  and 
disasters  of  nature,  the  longer  they  remain  unrepaired,  the  greater  be- 
come the  obstacles  to  repairing  them,  arising  from  the  aftergrowths 
which  would  have  to  be  torn  up  or  broken  through."  MILL,  Pol.  EC., 
Book  II,  Chap.  II,  §  2. 


50  THE  METHODS  OF  TAXATION 

The  conception  of  barter  seems  to  involve  also  the  prin- 
ciple that  men  should  keep  their  promises,  and  that  govern- 
ment may  justly  compel  them  to  do  so.  For  if  there  were 
no  legal  way  of  holding  men  to  their  contracts,  many  of 
the  most  important  ones,  which  require  time  for  their  per- 
formance, would  not  be  entered  into,  and  the  course  of  in- 
dustry would  be  interrupted  by  incessant  quarrels  over  the 
most  ordinary  transactions.  As  what  we  call  scientific 
knowledge  is  based  on  the  principle  of  the  uniformity  of 
natural  law,  which  enables  us  to  predict  the  future,  so  in 
human  affairs  it  seems  desirable  that  men  should  be  so  far 
as  possible  enabled  to  rely  on  having  their  expectations 
fulfilled.  Progress  consists  to  a  great  extent  in  eliminating 
or  overcoming  the  uncertainties  of  nature,  and  in  establish- 
ing relatively  permanent  conditions  in  industry.  In  spite 
of  our  great  achievements  in  this  direction,  disastrous  re- 
sults from  the  failure  of  reasonable  expectations  are  still 
common,  and  were  no  one  obliged  to  do  as  he  agreed  the 
mischief  would  be  incalculable.  In  order  to  avoid  the 
state  of  private  war  which  would  otherwise  prevail,  all 
governments  have  established  tribunals  for  the  purpose  of 
compelling  men  to  perform  their  promises,  or  to  pay  dam- 
ages for  their  failure ;  and  this  we  call  dispensing  justice. 
Indeed,  it  is  obvious  that  if  justice  requires  equalization 
of  opportunity,  the  application  of  this  principle  is  neces- 
sary. For  while  rich  men  might  be  able  to  compel  those 
with  whom  they  dealt  to  keep  faith,  poor  men  would  usually 
be  quite  helpless  if  the  law  did  not  help  them,  and  we  see 
that  the  condition  of  the  poorer  classes  is  extremely  miser- 
able in  communities  where  the  courts  fail  to  discharge  this 
obligation. 

[While  this  principle  of  justice  is  as  well  established  at 


LIMITATIONS  OF  PROPERTY  51 

law  as  it  is  in  morals,  the  propensity  of  rulers  to  exercise 
despotically  the  authority  with  which  they  are  clothed, 
manifested  through  the  colonial  governments,  caused  the 
insertion  in  the  constitution  of  the  United  States  of  the 
provision  already  referred  to,  that  no  state  shall  pass  any 
law  impairing  the  obligation  of  contracts.  We  need  not 
inquire  whether  or  no  the  federal  government  is  restrained 
by  this  principle,  as  we  wish  only  to  know  if  there  is  one 
standard  of  justice  for  rulers  and  another  for  subjects. 
The  criticism  which  this  constitutional  provision  has  often 
received  seems  to  indicate  that  some  such  distinction  is 
believed  to  exist.  Legislators  have  entered  into  corrupt 
and  improvident  contracts,  and  many  contracts,  apparently 
unobjectionable  when  made,  prove  oppressive  to  posterity. 
Now,  when  individuals  make  improvident  contracts,  their 
loss  may  be  said  to  be  limited  by  the  duration  of  their  own 
lives,  even  if  we  admit  that  their  children  may  feel  a 
natural  disappointment.  But  the  relation  of  the  legisla- 
ture to  coming  generations  differs  from  that  of  a  parent 
to  his  offspring  not  only  in  duration  but  also  in  extent. 
The  contract  of  the  legislature,  being  of  larger  scope,  may 
result  in  a  serious  impairment  of  that  equality  of  oppor- 
tunity which  is  of  the  essence  of  justice,  and  may  tend  to 
create  a  permanent  monopoly.  These  results  may  some- 
times become  so  intolerable  as  to  make  it  seem  a  less  in- 
justice to  break  the  contract  than  to  keep  it ;  they  may  even 
threaten  revolution.  Under  these  circumstances,  as  often 
happens  when  a  contract  made  by  individuals  proves  to  be 
very  onerous  to  one  of  them,  policy  may  advise  modifica- 
tions that  strict  law  would  not  enforce.  By  the  exercise  of 
legal  casuistry  courts  have  in  some  cases  sustained  laws 
that  did  impair  the  obligation  of  contracts ;  and  they  have 


52  THE  METHODS  OF  TAXATION 

not  always  required  due  compensation  to  be  given  for  prop- 
erty taken  for  public  use.  These  cases,  however,  are  on  the 
whole  exceptional,  and  the  most  strained  decisions  profess 
to  comply  with  the  principles  of  justice  laid  down  in  the 
constitution. 

As  has  been  observed,  in  a  progressive  society  conflict 
between  vested  rights  and  the  requirements  of  changed 
conditions  is  inevitable,  and  there  must  be  some  principle 
upon  which  the  conflict  can  be  regulated.  In  most  cases 
it  seems  clearly  just  that  the  public  should  compensate 
those  whose  rights  of  property  are  extinguished,  even  if 
the  state  has  made  no  express  contract  establishing  those 
rights.  For  we  think  it  as  unjust  for  rulers  to  disappoint 
the  reasonable  expectations  of  their  subjects,  as  for  other 
men  to  practice  deceit  in  their  dealings;  and  when  any 
form  of  property  has  been  legally  recognized,  it  seems  rea- 
sonable to  assume  that  this  recognition  will  continue,  on 
the  grounds  above  stated  in  considering  property  obtained 
through  exchange.1  But  these  grounds  themselves  suggest 
the  limits  of  what  it  is  reasonable  to  expect.  For  their 
chief  element  is  the  expediency  of  allowing  men  to  con- 
tract freely,  and  certain  kinds  of  property  may  in  time  be 


1  The  ideally  just  man  is  he  that  sweareth  to  his  own  hurt  and  chang- 
eth  not,  and  the  standard  of  the  law  is  really  not  much  below  this  ideal. 
The  courts  have  developed  the  doctrine  of  estoppel  in  pais,  or  by  con- 
duct, as  well  as  by  deed  and  record,  to  a  degree  that  commands  admira- 
tion. It  is  worth  while  to  quote  the  definition  of  estoppel  by  conduct 
given  by  Sir  James  Stephen.  "When  one  person  by  anything  which  he 
does  or  says,  or  abstains  from  doing  or  saying,  intentionally  causes  or 
permits  another  person  to  believe  a  thing  to  be  true,  and  to  act  upon 
such  belief  otherwise  than  but  for  that  belief  he  would  have  acted, 
neither  the  person  first  mentioned  nor  his  representative  in  interest  is 
allowed,  in  any  suit  or  proceeding  between  himself  and  such  person  or 
his  representative  in  interest,  to  deny  the  truth  of  that  thing."  Digest 
of  the  Law  of  Evidence,  Art.  102. 


LIMITATIONS  OF  PROPERTY  53 

found  to  interfere  with  this  right.  When  this  becomes 
very  apparent,  it  ceases  to  be  reasonable  to  expect  that  such 
kinds  of  property  will  be  permanent  Thus  men  were  long 
ago  restrained  by  the  statutes  against  perpetuities  from 
"  forging  those  fetters  that  seem,  by  restricting  the  do- 
minion of  posterity,  to  extend  their  own,"  and  proprietary 
rights  exercised  through  incorporations  have  been  repeat- 
edly curtailed.  Rulers  chosen  by  the  people  may  enter 
into  contracts  binding  on  the  present  generation ;  but  when 
they  create  burdens  for  men  yet  unborn,  it  is  reasonable 
to  expect  that  their  proceedings  will  be  eventually  subject 
to  revision. 

Such  modifications,  when  made  with  proper  caution,  do 
not  seem  to  constitute  a  disappointment  of  reasonable  ex- 
pectations, and  need  involve  no  breach  of  good  faith  by 
rulers.  Very  few  persons  would  be  hindered  from  engag- 
ing vigorously  in  the  acquisition  of  wealth  by  the  appre- 
hension that  the  period  during  which  they  could  render  it 
inalienable  after  their  death  might  be  at  any  time  short- 
ened by  law.  And  moreover  the  practical  influence  that 
may  be  wielded  by  the  managers  of  great  aggregations  of 
wealth  in  the  corporate  form  has  always  constituted  a 
warning  that  property  of  this  kind  is  more  exposed  to 
restriction,  if  not  actual  confiscation,  than  that  held  by 
individual  right;  and  the  statutes  of  mortmain  were  pro- 
fessedly enacted  because  the  free  transfer  of  property  was 
impeded  through  its  accumulation  by  certain  corporations. 
As  to  modern  industrial  corporations,  especially  those  that 
have  been  authorized  to  exercise  the  right  of  eminent  do- 
main, it  has  long  been  obvious  that  their  rights  of  property 
are  liable  to  somewhat  extensive  modification,  and  it  cannot 
be  said  that  a  purchaser  of  shares  in  these  bodies  is  dis- 


54  THE  METHODS  OF  TAXATION 

appointed  in  reasonable  expectations  when  the  burdens  laid 
on  them  are  increased  in  the  same  manner  in  which  they 
have  been  increased  in  the  past. 

In  recent  years,  too,  legislators  have  commonly  provided, 
in  granting  such  franchises,  that  the  rights  of  property 
conferred  shall  be  limited,  and  such  property  must  be  held 
to  be  acquired  by  individuals  with  notice  of  these  prospec- 
tive limitations.  In  practice,  however,  it  must  be  said,  the 
courts  appear  to  have  generally  annulled  laws  that  would 
effect  the  actual  confiscation  of  such  property,  and  to  have 
relieved  proprietors  from  burdens  that  would  deprive  men 
of  a  reasonable  return  from  their  investments.  On  the 
whole  it  seems  that  the  justice  of  the  principle  that  reason- 
able expectations  shall  not  be  disregarded  by  governments 
is  generally  recognized.  It  is  true  that  the  holders  of 
certain  kinds  of  property  have  been  sometimes  heavily 
amerced ;  but  this  has  in  modern  times  usually  been  when 
some  emergency  like  war  compelled  the  government  to 
obtain  revenue  as  it  could,  or  when  the  imposition  of  a 
new  burden  has  been  a  long  time  proposed,  or  when  it  is 
very  gradually  introduced.  The  common  sense  of  mankind 
does  not  appear  to  condemn  such  proceedings  as  violating 
the  good  faith  which  justice  requires  governments  to  ob- 
serve. The  maxim  "  caveat  emptor  "  is  notoriously  ap- 
plicable on  the  stock  exchange.  He  who  purchases  a  share 
in  a  corporate  enterprise  does  so  with  fair  warning  that, 
as  he  relieves  himself  of  the  personal  care  of  his  capital, 
he  is  liable  to  pay  for  this  relief  by  suffering  various 
amercements. 


CHAPTER   III 

UNEARNED  PROPERTY 

WITH  some  such  qualifications  as  have  been  stated, 
the  justice  of  most  existing  rights  of  property  seems  to  be 
generally  recognized.  But  there  is  one  species  of  property 
—  that  in  land;  or,  more  strictly,  the  rent  of  land  — 
which  is  declared  to  be  of  a  different  nature  from  all 
other  kinds,  and  to  be  indefensible  by  the  considerations 
that  support  the  justice  of  property  in  general.  This 
species  of  property,  it  is  said,  necessarily  deprives  men, 
both  those  now  living  and  those  yet  to  be  born,  of  that 
equality  of  opportunity  which  justice  demands.  While 
property  in  things  separated  by  labor  from  the  common 
mass  may  be  thought  less  absolute  than  is  asserted  by  the 
exponents  of  these  views,  property  in  the  surface  of  the 
earth  —  to  which  the  law  annexes  dominion  over  the  matter 
of  the  earth  as  far  as  its  center,  and  over  the  surround- 
ing atmosphere  upwards  to  infinity  —  should,  according  to 
them,  be  restricted,  or  abolished  altogether.  The  improver 
of  land,  it.  is  observed  by  Mill,  has  just  title  to  it,  but  not 
the  mere  proprietor.  The  principle  that  product  belongs 
to  the  producer  does  not  apply  to  the  raw  material  of  the 
earth.  "  It  is  no  hardship  to  any  one  to  be  excluded  from 
what  others  have  produced;  they  were  not  bound  to  pro- 
duce it  for  his  use,  and  he  loses  nothing  by  not  sharing  in 
what  otherwise  would  not  have  existed  at  all.  But  it  is 
some  hardship  to  be  born  into  the  world  and  to  find  na- 


56  THE  METHODS  OF  TAXATION 

ture's  gifts  previously  engrossed,   and  no  place  left  for 
the  new  comer." 

This  hardship,  however,  is  not  regarded  by  Mill  as 
implying  that  it  is  wrong  to  be  a  landlord,  and  his  pro- 
posed remedies  do  not  conflict  with  the  generally  accepted 
standards  of  justice.  They  are  intended  to  prevent  the 
acquisition  of  an  absolute  right  of  property  in  land  in  the 
future,  not  to  confiscate  such  rights  as  have  been  lawfully 
acquired  in  the  past.  This  is  not  true  of  the  measures 
proposed  in  Henry  George's  work,  "  Progress  and  Pov- 
erty." The  author  expresses  strong  indignation  at  that 
violation  of  what  he  calls  natural  justice  which  he  regards 
as  a  necessary  consequence  of  the  ownership  of  land  by 
individuals,  —  ownership  which  may  conceivably  be  un- 
limited in  extent  and  of  indefinite  duration.  He  maintains 
that  the  requirement  of  justice  that  there  be  equality  of 
opportunity  to  labor  can  be  met  only  when  every  human 
being  is  admitted  on  equal  terms  at  the  moment  of  birth 
as  a  tenant  in  common  with  all  the  existing  inhabitants 
of  the  earth.  At  present  the  soil  has  almost  everywhere 
fallen  into  the  exclusive  possession  of  a  small  part  of  the 
population,  the  landlords,  who  permit  its  use  by  their 
fellow  creatures  only  on  payment  of  a  tribute,  called  rent. 
In  so  far  as  land  has  been  made  productive  by  the  labor 
of  the  owner,  or  of  those  from  whom  he  derives  title,  it 
is  just  that  compensation  should  be  paid,  when  practicable, 
by  such  as  desire  to  take  advantage  of  this  productiveness ; 
but  title  by  occupation,  or  prescription,  having  no  founda- 
tion in  justice  originally,  can  gain  none  by  lapse  of  time. 
Those  having  no  other  title  are  regarded  as  mere  tres- 
passers on  the  common  estate,  and  justice,  so  far  from 
defending  their  possession,  demands  that  they  be  evicted. 


UNEARNED  PROPERTY  57 

It  is  only  the  proprietors  of  land  which  commands  no 
rent  that  need  not  be  disturbed;  for  no  one  would  be 
profited  by  disturbing  them.1 

So  far  as  the  existence  of  an  "  unearned  increment  of 
value  "  is  concerned,  i.  e.  a  value  not  created  by  the  labor 
of  the  landlord,  there  is  nothing  in  these  statements  that 
has  not  been  maintained  by  Mill  and  Adam  Smith;  and 
they  both  show  that  there  would  be  no  injustice  in  sub- 
jecting this  kind  of  property  to  special  taxation.  The 
term  "  rent,"  it  is  hardly  necessary  to  say,  is  here  used  in 
the  Ricardian  sense,  and  means  only  the  differential  profit 
or  revenue  derived  from  exceptionally  desirable  land,  so 
far  as  its  desirableness  has  not  been  caused  by  labor 
directly  spent  upon  it.  The  exceptional  value  of  such  land 
is  due  to  the  existence  of  societies  of  men,  the  members 
of  which  desire  to  use  their  productive  powers  to  the 
greatest  advantage,  and  compete  with  one  another  for  the 
most  favorable  situations  'and  opportunities.  The  land- 


1  "  If  all  existing  men  were  to  unite  to  grant  away  their  equal  rights, 
they  could  not  grant  away  the  right  of  those  who  follow  them.  For 
what  are  we  but  tenants  for  a  day?  Have  we  made  the  earth,  that  we 
should  determine  the  right  of  those  who  after  us  shall  tenant  it  in  their 
turn?  The  Almighty,  who  created  the  earth  for  man  and  man  for  the 
earth,  has  entailed  it  upon  all  the  generations  of  the  children  of  men  by 
a  decree  written  upon  the  constitution  of  all  things  —  a  decree  which  no 
human  action  can  bar  and  no  prescription  determine.  Let  the  parch- 
ments be  ever  so  many,  or  possession  ever  so  long,  natural  justice  can 
recognize  no  right  in  one  man  to  the  possession  and  enjoyment  of  land 
that  is  not  equally  the  right  of  all  his  fellows.  Though  his  titles  have 
been  acquiesced  in  by  generation  after  generation,  to  the  landed  estates 
of  the  Duke  of  Westminster  the  poorest  child  that  is  born  in  London 
to-day  has  as  much  right  as  has  his  eldest  son.  Though  the  sovereign 
people  of  the  State  of  New  York  consent  to  the  landed  possessions  of  the 
Astors,  the  puniest  infant  that  comes  wailing  into  the  world  in  the 
squalidest  room  of  the  most  miserable  tenement  house,  becomes  at  that 
moment  seized  of  an  equal  right  with  the  millionaires.  And  it  is  robbed 
if  the  right  is  denied." 


58  THE  METHODS  OF  TAXATION 

lords,  Adam  Smith  says,  who,  like  other  men,  love  to  reap 
where  they  have  not  sown,  take  advantage  of  this  compe- 
tition to  exact  from  their  tenants  all  that  the  land  will 
produce  beyond  the  ordinary  return  to  labor  and  capital. 
The  attention  and  good  management  of  the  landlord  may 
in  many  cases  account  for  some  part  of  the  ordinary  rent 
of  land,  but  "  ground-rents,  so  far  as  they  exceed  the 
ordinary  rent  of  land,  are  altogether  owing  to  the  good 
government  of  the  sovereign,  which,  by  protecting  the 
industry  either  of  the  whole  people,  or  of  the  inhabitants 
of  some  particular  place,  enables  them  to  pay  so  much 
more  than  its  real  value  for  the  ground  which  they  build 
their  houses  upon.  .  .  .  Nothing  can  be  more  reasonable 
than  that  a  fund  which  owes  its  existence  to  the  good  gov- 
ernment of  the  state  should  be  taxed  peculiarly,  or  should 
contribute  something  more  than  the  greater  part  of  other 
funds  towards  the  support  of  that  government." 

We  need  not  say  that  Adam  Smith  would  not  have 
countenanced  the  view  that  justice  requires  the  confisca- 
tion of  existing  ground-rents  had  it  been  presented  to  him ; 
and  Mill  clearly  explains  the  immorality  of  such  a  de- 
mand. It  is  based  upon  an  absolute  theory  of  justice, 
which,  even  as  an  ideal,  seems  to  find  little  support  either 
in  reason  or  experience.  If  the  attempt  is  made  to  apply 
it  in  practice  the  way  is  beset  with  difficulties.  For  the 
ground-rents  of  a  particular  city  are  caused  only  indi- 
rectly and  in  part  by  its  inhabitants.  So  far  as  they  are 
criminally  disposed,  or  even  indolent  and  improvident, 
their  presence  positively  diminishes  the  value  of  the  land ; 
and  in  many  cities  land  values  are  intimately  connected 
with  the  prosperity  of  the  country  at  large,  and  even  with 
that  of  the  whole  earth.  The  western  farmer,  when  his 


UNEARNED  PROPERTY  59 

grain  is  exported  from  New  York,  pays  tribute  to  the 
landlords  there,  and  the  same  is  true  of  the  people  of 
England  who  consume  this  grain.  Some  part  of  the  ex- 
pense of  importing  and  exporting  merchandise,  according 
to  this  theory,  consists  of  rent;  and  some  part  of  this 
charge  falls  on  the  producers  and  consumers  of  this  mer- 
chandise, wherever  they  may  live. 

Were  the  title  to  all  the  land  in  the  city  of  New  York 
vested  in  the  municipal  government,  justice  would  require 
that  it  should  distribute  its  rents  not  exclusively  among 
its  own  inhabitants,  nor  the  people  of  the  State  of  New 
York,  nor  even  the  people  of  the  United  States,  but  among 
the  people  of  the  whole  world.  For  an  absolute  theory  of 
justice  cannot  respect  persons,  nor  discriminate  against 
any  human  being  because  of  race  or  situation.  It  cannot 
regard  the  accident  of  birth  within  the  limits  of  a  parti- 
cular city  or  country  —  no  more  than  the  accident  of 
priority  of  time  of  occupation  —  as  giving  any  peculiar 
merit ;  and  when  a  child  is  born  in  Warsaw  or  in  Peking 
it  becomes  at  that  moment  seized  of  an  equal  right  with 
the  millionaires  of  the  city  of  New  York  and  of  all  the 
other  cities  of  the  earth.1  Such  rights  would  not  be 
enforced  by  taking  the  rents  of  a  city  from  their  present 
owners  and  giving  them  to  all  its  inhabitants.  This  would 
be  in  effect  to  recognize  one  of  the  most  odious  forms  of 
privilege  by  discriminating  not  only  against  aliens,  but 
also  against  citizens  born  outside  of  favored  places.  From 
this  conclusion  there  seems  no  escape;  and  if  we  admit 
that  the  theory  must  be  modified  in  practice,  it  ceases  at 

1  Although  in  the  passage  quoted  above  it  is  laid  down  that  natural 
justice  can  recognize  no  right  of  one  man  to  land  that  is  not  equally  the 
right  of  all  men,  the  author  elsewhere  contended  that  Chinamen  should 
be  excluded  from  the  United  States. 


60  THE  METHODS  OF  TAXATION 

once  to  be  absolute,  and  the  policy  to  be  followed  in  its 
modification  becomes  a  question  of  expediency. 

Indeed,  when  it  comes  to  the  practical  redistribution  of 
wealth,  there  seems  to  be  little  disposition  to  apply  the 
theory  that  every  human  being  is  entitled  to  an  equal 
share,  or  even  to  an  equal  opportunity  to  acquire  it.  The 
members  of  the  white  races  have  almost  invariably  denied 
such  equality  to  their  darker  colored  brethren,  and  most 
nations  discriminate  against  aliens,  even  when  they  do  not 
exclude  them.  Nor  if  the  absolute  nature  of  the  theory 
is  modified,  and  it  is  asserted  only  of  the  members  of  a 
particular  state,  do  we  find  any  general  disposition  to 
accept  it,  unless  among  those  who  may  be  beneficially 
interested.  For  there  are  everywhere  territorial  divisions 
and  boundaries  of  communities,  and  the  residents  of  every 
community  appear  to  consider  it  just  that  they  should 
enjoy  their  own  peculiar  advantages  of  situation,  and  not 
be  compelled  to  make  them  over  to  the  dwellers  in  less 
favored  places.  In  other  words,  the  theory  in  question 
would  consistently  require  that  cities  should  be  treated  like 
individual  men,  and  distribute  the  rents  that  they  exact 
among  all  those  from  whom  they  are  exacted;  while  in 
fact  even  those  who  advance  the  theory  seem  not  to  regard 
this  as  just.  On  the  other  hand,  were  the  rents  of  such 
a  city  as  !N"ew  York  to  be  employed  in  giving  freely  to 
its  inhabitants  many  things  which  they  now  obtain  only 
by  labor,  there  would  probably  result  a  great  addition  to 
the  population,  through  immigration  as  well  as  through 
an  increased  birth  rate.  Were  this  increment  of  popula- 
tion laborious,  it  might  tend  to  increase  rent,  and  thus 
exact  for  the  city  an  additional  tribute  from  the  outside 
world,  thereby  still  more  encouraging  immigration,  and 


UNEARNED  PROPERTY  61 

so  on.  But  were  the  people  demoralized  by  this  redis- 
tribution of  wealth,  as  appears  to  have  happened  when  the 
people  of  Rome  received  largesses  from  the  rulers,  there 
might  result  a  decrease  in  rent,  and  a  diminution  of  the 
benefits  freely  distributed,  followed  by  such  social  dis- 
orders as  are  related  in  Roman  history.  The  fundamental 
weakness  of  the  theory  evidently  lies  in  its  ignoring  desert, 
and  assuming  mere  existence  in  a  certain  place  to  con- 
stitute a  just  claim  to  a  share  in  whatever  advantages  the 
place  enjoys,  without  regard  to  their  cause. 

Were  the  claim  that  justice  requires  the  expropriation 
of  landlords  supported  by  even  stronger  arguments,  it 
would  seem  impossible  for  it  to  command  that  general 
assent  which  we  regard  as  indispensable.  Such  assent  is 
rendered  less  possible  in  this  country,  not  only  because 
of  the  great  number  of  land  owners,  but  also  because  of 
the  even  greater  number  of  persons  who  through  loans 
secured  by  mortgages  to  individuals  and  fiduciary  insti- 
tutions, and  through  ownership  of  shares  in  corporate 
enterprises,  belong  practically  to  the  same  class.  To  over- 
come the  support  generally  accorded  to  the  constitutional 
provision  for  compensation  when  property  is  taken  for 
public  use,  it  would  be  necessary  to  convince  the  members 
of  this  class,  which  probably  comprises  much  more  than 
half  the  population,  that  the  confiscation  of  rent  would  pro- 
mote the  general  welfare,  if  not  their  own  interests.  No 
doubt  it  is  urged  with  much  force  that  such  confiscation 
would  greatly  stimulate  industry  by  relieving  it  of  the 
incubus  of  an  idle  class;  but  this  result  is  highly  prob- 
lematical. Those  without  capital  could  not  lease  land; 
those  with  capital  are  able  now  to  obtain  land  of  which 
they  can  make  profitable  use,  and  their  exemption  from 


62  THE  METHODS  OF  TAXATION 

other  taxes  would  tend  to  give  them  for  a  short  time  an 
inordinate  profit. 

On  the  other  hand,  it  is  altogether  uncertain  to  what 
extent  enterprising  men  would  lease  land  which  they  know 
could  not,  so  far  as  they  are  concerned,  increase  in  value, 
and  from  which  they  might  be  dispossessed  by  any  one 
who  would  pay  them  the  cost  of  producing,  or  reproduc- 
ing, their  improvements.1  Experience  seems  to  show  that 
men  are  not  willing  to  make  very  costly  improvements 
on  leased  land  unless  they  hold  it  for  a  long  time;  but 
the  advances  in  the  value  of  land  are  often  very  rapid, 
and  the  "  unearned  increment "  during  the  term  might 
be  very  great.  Yet  should  there  be  a  decrease  in  the  value 
of  land,  it  might  not  seem  altogether  just  for  the  govern- 
ment to  compel  its  tenants  to  pay  rent  that  they  could  not 
earn;  and  while  such  problems  can  be  dealt  with  by  the 
English  rulers  when  they  arise  in  India,  and  might  be 
if  they  should  arise  in  Ireland,  they  could  not  be  so  easily 
handled  by  the  governments  of  our  own  country.  Had 
the  owners  of  tillable  land  in  some  parts  of  England  been 
dispossessed  a  generation  ago,  and  had  the  government 
relet  this  land,  it  might  find  itself  now  obliged  to  forego 
its  rent  and  face  conditions  similar  to  those  which  have 
made  Irish  landlords  so  unpopular.2 

1  It  is  evident  that  if  unoccupied  land  is  taxed  at  a  high  rate  in  order 
to  induce  the  owners  to  improve  it,  the  buildings  erected  will,  probably, 
be  of  a  character  inferior  to  what  would  have  been  erected  had  the  land 
remained  unoccupied  until  its  value  had  increased.    While  the  com- 
munity might  gain  an  increased  present  revenue,  posterity  might  suffer 
through  the  expense  of  destroying  and  replacing  unsuitable  structures. 
To  a  certain  extent,  however,  this  loss  is  inevitable  in  a  progressive 
society;     and    were    buildings    not    taxed    the     process    would    be 
modified. 

2  Sir  A.  Milner  and  Sir  R.  Giffen,  testifying  before  the  commission 
on  agriculture  in  1896,  estimated  that  the  value  of  farming  land  in  the 


UNEARNED  PROPERTY  63 

It  should  bo  added  that  even  if  we  admit  it  to  be  prac- 
ticable to  distinguish  the  value  of  improvements  from  that 
of  the  land,  this  latter  value  may  have  been  partly  created 
by  the  sagacity  of  the  owner,  or  by  the  acts  of  individuals 
or  bodies  of  men,  more  than  by  the  labors  of  the  citizens 
at  large.  Thus  the  extension  of  the  elevated  railways  in 
the  city  of  New  York  increased  the  value  of  much  land 
three  or  four  fold,  and  those  who  ventured  their  capital 
in  an  enterprise  which  was  at  first  of  very  uncertain  out- 
come, might  seem  to  have  a  just  claim  to  some  part  of  this 
increment,  at  least  as  against  the  landlords,  and  perhaps 
against  the  community.  For  if  the  enterprise,  while  en- 
hancing the  value  of  land,  had  not  proved  remunerative 
to  those  who  carried  it  on,  it  would  probably  not  have 
been  thought  just  to  repay  them  their  losses;  but  if  this 
would  not  be  just,  it  would  seem  reasonable  to  allow  them 
something  more  than  the  ordinary  rate  of  gain,  since  the 
community  was  greatly  benefited  through  the  happy  out- 
come of  the  venture.  The  construction  of  railroads  through 
the  prairies  of  the  west  was  followed  by  an  increase  in 
the  value  of  land  often  ten  or  twenty  fold;  and  it  seems 
unjust  that  settlers  who  acquired  this  land  for  a  nominal 
price  should  appropriate  the  whole  of  an  increment  that 
was  created  certainly  in  part  by  the  capital  invested  in 
railroad  building. 

The  value  of  land  may  be  said  to  be  everywhere 
created  by  its  accessibility  as  much  as  by  any  other 
cause,  and  the  dominant  landlords  seem  therefore  to  be 
the  owners  of  railroads  and  canals.  But  no  one  would 


United  Kingdom  had  been  reduced,  because  of  American  competition, 
from  about  £2,000,000,000  in  1874,  to  less  than  £1,000,000,000  in 
1894. 


64  THE  METHODS  OF  TAXATION 

venture  to  assign  a  definite  increase  or  decrease  of  the 
value  of  a  particular  piece  of  land  as  the  effect  of  the 
construction  of  the  Suez  or  the  Panama  canal ;  and  while 
we  may  be  satisfied  that  the  value  of  farming  land  in 
England  has  been  greatly  diminished,  and  that  of  farm- 
ing land  in  the  United  States  greatly  increased,  by  the 
construction  of  railways  and  canals,  and  by  the  improve- 
ment of  steam  engines  and  vessels,  it  seems  hopeless  to 
attempt  to  apportion  the  benefits  in  accordance  with  any 
theory  of  justice,  or  to  offset  the  gains  against  the  losses. 
The  difficulty  of  adjusting  the  charges  for  transportation 
is  notorious,  communities  seeming  to  be  as  jealous  of  one 
another  as  individuals;  and  were  the  government  to  con- 
fiscate the  railways,  it  would  be  altogether  beyond  its 
powers  to  apportion  the  expected  advantages  in  such  a  way 
as  to  satisfy  the  demands  put  forth  as  just  by  different 
states  and  cities.  For  it  is  easy  to  see  that  such  rates  as 
would  satisfy  one  would  be  ruinous  to  others,  and  the 
only  practical  solution  would  be  by  compromises  dictated 
by  necessity  and  expediency,  and  not  in  accord  with  any 
absolute  theory  of  justice.  The  fact  that  common  owner- 
ship of  land  has  everywhere  prevailed  in  the  past,  and 
been  almost  everywhere  abandoned,  must  be  taken  to  prove 
that  individual  ownership  is  not  generally  regarded  by 
mankind  as  unjust. 

Apart  from  considerations  of  expediency  and  conveni- 
ence, it  seems  probable  that  men  recognize  the  existence 
of  an  "  unearned  increment "  in  the  values  of  other  things 
as  well  as  land,  and  that  this  increment  is,  abstractly,  no 
more  defensible  than  ground-rent.  The  theory  of  those 
who  would  confiscate  ground-rents  is  too  broad  to  be  ap- 
plicable in  practice,  while  as  regards  personal  property 

f  V 


UNEARNED  PROPERTY  65 

it  is  too  narrow  and  arbitrary.     As  we  have  seen,  the  as- 
sertion that  a  man  has  a  right  to  what  he  has  produced 
by  his  own  exertions  is  ambiguous.     Evidently  he  cannot 
produce  matter,  but  can  at  most  move  certain  parts  of 
it,  and  separate  and  combine  them  for  useful  purposes. 
This  matter,  as  well  as  the  mere  surface  of  the  earth,  may 
be  subjected  to  monopoly,  being  also  limited  in  quantity;    , 
and  justice  demands  equality  in  the  distribution  of  the 
former  as  well  as  the  latter.     Indeed  we  seem  to  regard 
justice  as  outraged  not  so  much  by  the  nature  as  by  the 
disproportionate   size   of  possessions;    the  ownership   of 
great  accumulations  of  personalty  may  be  as  offensive  as 
that  of  great  tracts  of  land.    We  cannot  well  contend  that 
no  one  may  rightfully  own  a  diamond  mine,  while  we 
maintain  an  absolute  right  to  own  diamonds  which  some 
fortunate  miner  took  from  it  before  other  persons  knew      v    n/ 
that  it  existed,  —  perhaps  before  such  persons  came  into  ^  jr. 
existence.     Nor  does  it  seem  easier,  practically,  to  estabi^    i/"* 
lish  a  clear  title  to  movable  things  in  general  than  to  realx 
estate.    As  labor  has  in  most  cases,  at  least  in  long  settled! 
countries,  become  inextricably  mixed  with  land,  and  can- 
not in  fact  be  applied  to  matter  without  the  possession  of 
land,  so  movables  are  but  detached  portions  of  land.    Some 
degree  of  possession,  in  short,  is  indispensable  to  every 
form  of  industry.     The  title  to  movable  things  must  be 
vested  in  the  landlords  or  have  been  derived  through  them ; 
and  if  they  had  no  title  they  could  give  none. 

Moreover,  in  spite  of  the  justice  of  prescriptive  right, 
it  must  be  admitted  that  whatever  claim  to  any  form  of 
property  is  attained  by  labor  is  in  common  estimation 
lessened  by  lapse  of  time.  Hardly  any  one  disputes  the 
justice  of  securing  to  the  laborer  the  immediate  results 

5 


66  THE  METHODS  OF  TAXATION 

of  his  toil ;  but,  as  years  pass  on,  his  claim  gradually  ceases 
to  impress  us  so  strongly,  and  a  presumption  appears  in- 
sensibly to  arise  that  the  due  reward  of  his  exertions  has 
been  paid.  The  most  striking  illustration  of  this  tendency 
occurs  in  the  case  of  authors.  It  is  only  in  modern  times 
that  they  have  obtained  legal  protection  of  the  results  of 
their  labors,  in  spite  of  the  fact  that  the  immaterial  na- 
ture of  their  products  excludes  the  possibility  of  monopoly. 
The  author's  property  consists  merely  in  the  exclusive 
right  to  repeat,  or  copy,  a  particular  arrangement  of  words 
which  he  has  devised,  and  which  no  one  else  could  have 
produced,  either  by  accident  or  design.  This  right  can 
frequently  have  little  value  unless  it  can  be  sold  and 
preserved  indefinitely;  but  the  law  limits  its  duration, 
so  that  it  may  expire  even  in  the  author's  lifetime.1 

In  general  it  seems  to  be  true  that  the  title  to  very 
desirable  things  that  have  come  into  the  possession  of  such 
as  did  not  produce  them  is  justified  on  other  grounds  than 
the  original  expenditure  of  labor  thereon.  Labor  being 
conceived  as  performed  in  order  to  satisfy  the  wants  of 
the  laborer,  the  title  that  it  gives  must  somehow  and  in 
some  degree  be  commensurate  with  those  needs.  As  the 
titles  to  a  great  number  of  things  may  in  the  course  of 
years  become  vested  in  a  single  person,  we  find  ourselves 


1  Probably  there  is  some  confusion  in  the  mind  of  the  public  between 
copyright  and  patent  right,  which  has  operated  to  the  disadvantage  of 
authors.  There  is,  however,  no  analogy  between  the  cases,  the  letters 
patent  granting  a  monopoly  of  the  use  of  matter  in  a  specified  way,  al- 
though the  idea  of  making  such  use  may  have  occurred  to  many  before 
the  letters  were  granted,  and  would  probably  have  occurred  to  others 
long  before  the  term  expired.  The  statute  of  1710  accidentally  curtailed 
the  author's  right,  which  was  unlimited  at  Common  Law.  The  ideas 
expressed  by  an  author  become  public  property;  those  of  the  patentee 
can  be  made  use  of  by  others  only  with  his  consent. 


UNEARNED  PROPERTY  67 

less  disposed  to  regard  the  labors  of  the  original  creators 
of  these  things,  than  to  inquire  how  their  present  owner 
is  justified  in  possessing  far  more  wealth  than  is  sufficient 
for  ordinary  requirements.  The  right  of  a  man  to  the 
product  of  his  own  exertions  may  be  unquestionable;  but 
the  right  of  one  man  to  what  has  been  produced,  not  by 
his  own  labor  but  by  that  of  a  hundred  others,  is  different, 
and  cannot  be  justified,  as  was  attempted  by  Henry  George, 
by  asserting  that  what  the  laborer  produces  is  his  for  all 
time.  On  the  contrary,  it  is  now  coming  to  be  under- 
stood, as  we  have  seen,  that  rent  is  a  phenomenon  not 
peculiar  to  land,  but  a  generic  feature  of  all  property,  the 
acquisition  of  which  is  not  subject  to  free  competition. 
The  vogue  of  the  term  "  unearned  "  signifies  that  desert 
is  now  regarded  as  an  essential  element  in  establishing  the 
justice  of  ownership ;  and  desert  is  not  an  inherent  quality 
of  wealth,  whether  real  or  personal,  and  cannot  be  trans- 
ferred or  inherited.  There  may  be  good  reasons  for  main- 
taining existing  rights  of  property  in  general ;  but,  so  far 
as  abstract  justice  is  concerned,  property  in  land  seems  no 
less  defensible  than  such  personal  property,  at  least,  as 
consists  of  portions  of  matter. 

While  moralists  have  always  maintained  the  justice  of 
compensating  desert,  or  service  rendered  to  society,  this 
view  has  now  become  so  prevalent  that  we  might  say  that 
desert  is  regarded  as  limiting,  at  the  same  time  that  it 
supports,  the  right  of  property.  As  Mill  remarked,  no 
man  works  by  himself  in  our  modern  world.  In  every  act 
of  his  life  he  is  aided  by  the  present  or  past  cooperation 
of  others,  and  as  nothing  is  the  product  exclusively  of 
his  own  exertions,  he  can  maintain  no  absolutely  exclu- 
sive right  in  what  he  is  said  to  produce.  The  creation 


68  THE  METHODS  OF  TAXATION 

of  wealth  to  any  considerable  extent  is  possible  only 
through  the  organization  of  industry.  In  this  organiza- 
tion, and  in  its  defense  and  protection,  nearly  all  the 
members  of  society  may  be  said  to  participate,  and  they 
justly  share  in  the  wealth  that  could  not  have  been  pro- 
duced without  their  participation.  When  Adam  Smith 
observed  that  ground-rents  were  altogether  owing  to  the 
good  government  of  the  sovereign,  or,  as  we  should  say, 
to  the  existence  of  an  orderly  society,  he  stated  a  law,  as 
we  have  seen,  that  is  not  applicable  to  land  alone.  The 
wages  of  labor  and  the  profits  of  capitalists  are  beyond 
question  increased  by  the  security  afforded  by  a  good 
government,  and  this  increase  may  be  an  "  unearned  in- 
crement "  as  much  as  the  rent  of  land.  Hence  we  find  it 
maintained  that  whoever  possesses  wealth  of  any  kind, 
acquired  without  rendering  any  service  to  society,  may 
with  justice,  according  to  the  principle  stated  by  Adam 
Smith,  be  taxed  peculiarly,  or  contribute  something  more 
than  others  to  the  support  of  the  government. 

In  opposition  to  this  claim  it  is  plausibly  argued  that 
the  actual  difference  between  the  deserts  of  different  men, 
measured  by  the  values  of  their  services,  is  far  greater 
than  is  commonly  understood.  An  incompetent  or  dis- 
honest servant  frequently  does  his  master  more  harm  than 
good.  He  injures  or  makes  away  with  what  is  committed 
to  his  charge,  so  that  the  value  of  his  services  is  actually 
negative.  A  faithful  and  capable  servant,  on  the  other 
hand,  may  greatly  improve  his  master's  property.  Were 
the  results  of  his  management  compared  with  those  of  the 
bad  servant's,  his  desert  might  be  measured  by  the  whole 
value  of  the  property  affected,  for  he  has  both  preserved 
and  increased  it,  while  the  other  would  have  destroyed  it. 


UNEARNED  PROPERTY  69 

So  in  manufacturing  or  mercantile  business,  a  bad  man- 
ager may  cause  the  loss  of  the  whole  capital  invested, 
while  it  may  be  doubled  by  a  good  manager.  In  the  same 
way  a  bad  lawyer  will  lose  a  case  which  a  good  one  would 
have  gained,  and  a  capable  physician  will  save  the  life 
of  a  patient  who  would  have  died  under  the  treatment  of 
an  incompetent  practitioner.  So  whoever  invents  a  method 
of  attaining  any  useful  result  with  less  labor  than  has  been 
before  required,  or  discovers  some  new  property  of  matter, 
may  render  a  valuable  service  to  all  mankind,  and  deserve 
a  corresponding  recompense.  In  all  such  cases  the  size 
of  the  reward,  it  is  claimed,  is  often  less  than  would  be 
justified  by  the  value  of  the  service  rendered.  The  com- 
munity is  really  richer,  after  paying  this  reward  to  its 
servants,  than  it  would  have  been  had  their  service  not 
been  rendered,  and  their  compensation,  so  far  from  being 
greater  than  they  deserve,  is  less  than  justice  would  award 
them.  Certainly,  we  can  hardly  estimate  in  millions,  or 
perhaps  billions,  of  dollars  the  value  to  the  world  of  the 
services  of  the  inventors  of  the  steam  engine  and  the 
sewing  machine;  and  money  cannot  measure  our  debt  to 
the  discoverers  of  anaesthetics  and  to  those  who  have  de- 
veloped antiseptic  surgery. 

There  is  much  force  in  this  argument,  and  its  validity 
is  to  a  certain  extent  generally  admitted.  It  is  possible, 
of  course,  to  say  that  nature  is  itself  unjust  in  its  distri- 
bution of  natural  endowments,  and  that  those  who  have 
been  favored  by  birth  or  ancestry  with  exceptional  strength 
and  ability  are  not  on  that  account  meritorious  or  de- 
serving. But  this  is  carrying  the  analysis  further  than  is 
demanded  by  common  sense,  and  congenital  superiority  is 
generally  regarded  as  justly  entitling  its  possessors  to  cor- 


70  THE  METHODS  OF  TAXATION 

responding  rewards ;  otherwise  the  survival  of  the  inferior 
would  be  encouraged.  Conceding  this,  however,  it  may 
be  replied  that  the  argument  amounts  to  little  more  than 
an  explanation  of  the  methods  according  to  which  rewards 
are  now  distributed,  and  begs  the  question  of  their  justice. 
This  appears  more  clearly  if  we  press  the  argument,  and 
inquire  whether  it  would  be  just  for  a  physician  of  ex- 
ceptional skill  to  refuse  to  save  the  life  of  a  rich  man 
unless  the  patient  would  requite  him  with  the  whole  of 
his  fortune,  or  whether  lawyers  might  justly  charge  their 
clients  fees  equal  to  the  sums  which  but  for  their  labor  the 
clients  would  have  lost.  The  exaction  of  such  payments 
would  be  universally  condemned  as  unjust;  yet,  strictly 
speaking,  it  would  be  no  more  than  equivalent  in  value 
to  the  service  rendered.  In  common  speech  conduct  of 
this  kind  is  described  as  taking  an  unfair  advantage  of 
the  necessities  of  the  person  served,  and  this  implies  some 
other  standard  of  justice  than  that  employed  when  we 
measure  value  of  services  by  the  loss  which  would  be 
suffered  if  they  were  not  rendered.  But,  when  we  ask 
what  this  standard  is,  we  are  usually  referred  to  what 
is  customary;  and  in  practice  the  justice  of  a  charge 
or  compensation  in  any  particular  case  is  apt  to  be 
determined  by  what  others  would  charge  for  the  service 
under  like  circumstances.  We  still  lack  some  element 
enabling  us  to  say  whether  customary  payments  are  just 
or  not. 

Yet  some  light  is  thrown  on  the  problem  by  this  exami- 
nation, for  the  appeal  to  what  is  customary  suggests  the 
existence  of  competition  among  those  who  have  services 
to  sell.  We  may  assume  that  whenever  anything  or  any 
service  is  found  to  be  of  great  value  to  the  community, 


UNEARNED  PROPERTY  71 

many  persons  will  endeavor  to  furnish  the  necessary  supply, 
and  that  after  a  time  the  compensation  obtained  by  such 
persons  will,  in  many  departments  of  industry,  tend  to 
become  no  greater  than  what  they  would  obtain  by  em- 
ploying their  time  and  money  in  other  occupations.  Hence 
in  a  community  where  perfectly  free  and  speedy  compe- 
tition prevailed,  the  customary  rewards  would  tend  to 
be  the  same  as  those  required  by  ideal  justice.  For  if  any 
one  attempted  to  charge  more  for  his  services  than  their 
equivalent,  measured  by  their  "  cost  of  production,"  others 
would  soon  underbid  him.  Thus  no  one  could  obtain  ex- 
ceptionally large  compensation  unless  his  service  were  of 
such  exceptional  value  as  was  due  to  his  individual  excel- 
lence, —  a  kind  of  desert  which  we  must  for  practical  pur- 
poses agree  to  accept  as  a  part  of  the  natural  order  of 
things.  In  this  way  the  issue  becomes  really  one  of  fact 
and  may  therefore  be  decided  by  evidence  furnished  by 
experience.  Accordingly  we  find  those  who  assert  the 
justice  of  the  existing  distribution  of  wealth  maintaining 
that  free  competition  exists,  and  appealing  to  the  many 
instances  where  poor  men  have  acquired  great  wealth,  as 
proof  that  rewards  are  fairly  proportioned  to  deserts. 

There  are  undoubtedly  so  many  cases  of  this  kind  as 
to  constitute  some  approximation  to  justice,  and  to  make 
the  mass  of  mankind  tolerably  submissive  to  existing  in- 
stitutions. Yet,  when  we  consider  the  facts,  it  appears 
that  many  great  fortunes  are  acquired  by  those  who  have 
avoided,  or  been  relieved  from,  competition.  Inventors 
seem  to  be  a  peculiarly  deserving  class  of  citizens,  but  the 
effect  of  the  patent  laws  is  to  favor  those  who  are  prior  in 
their  application,  to  the  total  exclusion  of  others  whose 
desert  is  substantially  equal.  It  frequently  happens  that 


72  THE  METHODS  OF  TAXATION 

a  number  of  persons  are  in  search  of  some  improvement, 
and  discover  it  simultaneously;  but  while  one  becomes 
very  rich  from  the  monopoly  granted  him  by  law,  the 
others  are  prohibited  from  making  any  use  of  the  product 
of  their  labors.  It  is  equally  notorious  that  inventors 
have  been  sometimes  unable  through  poverty  to  make 
profitable  use  of  their  discoveries,  and  that  those  who  have 
furnished  them  money  have  obtained  the  greater  share  of 
the  gains  arising  from  their  patent  rights.  Much  the  same 
is  true  of  the  discoveries  of  mines;  the  fortunes  made  by 
those  who  have  purchased  the  claims  of  these  discoverers 
being  especially  conspicuous  illustrations  of  wealth  ac- 
quired through  exemption  from  competition.  The  public 
has  been  abundantly  informed  also  that  many  large  for- 
tunes have  been  created  by  the  rapid  advance  in  the  value 
of  land,  which  is  attributed  to  the  relative  scarcity  caused 
by  the  growth  of  population  and  the  attendant  monopoly 
obtained  by  the  land  owners.  In  some  notable  instances 
great  wealth  is  thought  to  have  been  accumulated  by  men 
engaged  in  manufacturing,  by  means  of  rebates,  or  unfairly 
low  rates  of  transportation,  which  have  enabled  them  to 
undersell  their  competitors. 

It  is  notorious  also  that  temporary  monopolies  arise  in 
every  branch  of  trade,  through  control  of  the  supply  of 
any  staple  commodity.  Bagehot,  in  speaking  of  the  power 
of  the  Bank  of  England  to  fix  the  rate  of  interest,  ob- 
serves "  A  single  large  holder,  —  especially  if  he  be  by 
far  the  greatest  holder,  —  may  fix  his  price,  and  other 
dealers  may  say  whether  or  not  they  will  ask  more  than 
he  does.  A  very  considerable  holder  of  an  article  may  for 
a  time  vitally  affect  its  value  if  he  lay  down  the  minimum 
price  which  he  will  take,  and  obstinately  adhere  to  it. 


UNEARNED  PROPERTY  73 

This  is  the  way  in  which  the  value  of  money  in  Lombard 
Street  is  settled."  1 

This  description  applies  to  numberless  "  corners,"  or 
temporary  monopolies ;  and  perhaps  most  of  the  great  for- 
tunes made  in  commerce  have  been  due  to  sagacious  specu- 
lation concerning  the  fluctuations  of  demand  and  supply. 
The  methods  employed  are  too  familiar  to  require  mention ; 
but  they  are  frequently  such  as  forbid  the  speculator  to 
assert  that  his  gain  is  justified  by  any  service  to  the  com- 
munity. For  such  operations  in  modern  trade  very  great 
capital  is  necessary;  only  the  possessors  of  large  fortunes 
can  engage  in  them.  Such  fortunes  have  thus  come  to  be 
denounced  by  many  writers  as  equally  unjust  in  their 
acquisition  and  in  their  employment;  they  are  said  to  be 
created  at  the  expense  of  the  public  and  used  to  its  detri- 
ment. The  ability  of  their  possessors,  it  is  maintained,  is 
misdirected.  Their  labor  is  pernicious;  and  those  to 
whom  their  wealth  passes  hold  it  by  a  title  resting  in  law 
and  not  in  justice. 

In  recent  times  many  fortunes  have  been  made  in  "  re- 
organizing "  and  in  combining  enterprises,  by  persons 
standing  in  such  relations  to  these  enterprises  as  to  make 
it  impossible  for  others  to  compete  with  them.  In  these 
affairs  the  possession  of  exclusive  information  concerning 
important  plans  or  "  developments,"  has  enabled  those 
favored  to  enrich  themselves.  Through  family  influence, 

1  "The  reason  is  obvious.  At  all  ordinary  moments  there  is  not 
money  enough  in  Lombard  Street  to  discount  all  the  bills  in  Lombard 
Street  without  taking  some  money  from  the  Bank  of  England.  As  soon 
as  the  Bank  rate  is  fixed,  a  great  many  persons  who  have  bills  to  dis- 
count try  how  much  cheaper  than  the  Bank  they  can  get  these  bills  dis- 
counted. But  they  seldom  can  get  them  discounted  very  much  cheaper, 
for  if  they  did  every  one  would  leave  the  Bank  and  the  outer  market 
would  have  more  bills  than  it  could  bear." 


74  THE  METHODS  OF  TAXATION 

or  friendship,  and  by  political  favor,  many  lawyers  obtain 
lucrative  positions  or  profitable  business ;  and  the  methods 
of  obtaining  public  office  are  notorious.  Physicians,  as  a 
rule,  must  depend  more  on  their  own  abilities  to  meet 
competition;  but  they  are  often  aided  by  personal  influ- 
ence, and  only  popular  authors  and  artists  have  clear  titles 
to  the  comparatively  modest  fortunes  which  they  acquire. 
In  all  the  other  cases,  it  may  be  contended,  the  services  for 
which  such  great  rewards  have  been  received  are  either 
of  little  value  to  society,  or  would  have  been  rendered  for 
very  much  less  had  competition  been  allowed.  Much 
wealth,  it  must  be  admitted,  is  acquired  by  fraudulent  use 
of  their  position  by  trustees,  and  much  by  positive  cheating. 
Much,  too,  is  acquired  by  gambling,  including  under  this 
term  a  large  part  of  the  transactions  on  the  exchanges ;  and 
in  such  cases  it  is  obvious  that  the  gains  of  one  speculator 
are  made  up  of  the  losses  of  others. 

Making  every  allowance  for  popular  exaggeration,  there 
seems  to  be  sufficient  truth  in  the  foregoing  statements  to 
render  it  impossible  to  regard  the  title  to  many  fortunes 
as  justified  by  the  deserts  of  their  proprietors.  The  facts 
in  many  cases  are  too  well  known  in  the  business  world 
to  be  disputed,  and  some  of  them  have  been  judicially  es- 
tablished. Without  going  to  the  length  of  asserting  that 
every  poor  man  is  by  virtue  of  his  poverty  incapable  of 
competing  on  fair  terms  with  the  wealthier  persons  to 
whom  he  must  sell  his  labor,  we  cannot  deny  that  competi- 
tion is  so  imperfect  in  certain  departments  of  human 
activity  as  to  enable  many  persons  to  obtain  wealth  with- 
out rendering  corresponding  services;  and  this  seems  to 
imply  that  such  equality  of  opportunity  as  justice  would 
require  does  not  prevail. 


UNEARNED  PROPERTY  75 

Yet,  so  far  as  existing  wealth  is  concerned,  there  is  some 
ground  for  regarding  this  conclusion  as  mistaken.  The 
fact  that  the  title  to  great  possessions  is  vested  in  a  single 
individual  by  no  means  proves  that  the  opportunities  of 
others  to  acquire  wealth  are  thereby  limited,  or  that  com- 
petition is  thereby  prevented.  For  the  wealth  of  the  rich 
man  must  usually  be,  as  we  say,  "  invested  " ;  i.  e.9  it  must 
be  employed  as  capital  in  producing  more  wealth;  which 
is  indeed  a  most  effective  way  of  increasing  opportunities. 
This  process  necessarily  furnishes  opportunities  for  activ- 
ity, both  to  those  who  know  how  to  use  capital  effectively, 
and  to  laborers,  and  perhaps  under  the  most  advantageous 
conditions.  If  the  same  amount  of  wealth  were  divided 
among  a  hundred  owners,  it  might  either  be  invested  by 
them,  as  it  was  by  the  sole  owner,  or  used  directly;  in 
which  case  they  would  take  the  place  of  the  former  users. 
So  far  as  production  on  a' large  scale  is  advantageous,  the 
tendency  would  be  to  investment;  and,  so  far  as  income 
is  concerned,  the  rich  man  is  perhaps  more  likely  to  re- 
invest it  than  the  man  in  moderate  circumstances.  The 
division  of  wealth  might  thus  operate  to  reduce  the  rate  of 
its  production,  and  in  that  way  to  restrict  rather  than  to 
enlarge  opportunity ;  for  it  cannot  be  too  strongly  empha- 
sized that  to  invest  capital  and  to  furnish  employment  to 
laborers  are  the  same  thing.  Furthermore,  experience 
seems  to  prove  that  the  capacity  to  manage  capital  is  rare ; 
for,  of  those  who  undertake  mercantile  business,  which  is 
perhaps  the  simplest  form  of  business,  it  is  said  that  ten 
fail  where  one  succeeds,  and  such  persons  are  not  apt  to 
be  wiser  when  they  invest  in  the  enterprises  of  others  than 
when  they  attempt  management  for  themselves.  And 
many  would  agree  with  Adam  Smith  that  the  management 


76  THE  METHODS  OF  TAXATION 

of  industrial  affairs  by  government  is  almost  always  waste- 
ful, and  that  to  appropriate  a  large  part  of  the  wealth  of 
the  rich  for  public  uses  would  tend  to  impoverish  the  people, 
by  creating  a  privileged  class  of  placeholders  who  consume 
wealth  that  would  otherwise  be  employed  productively. 

It  is  urged,  also,  that  the  injustice  complained  of  —  the 
denial  of  opportunity  to  acquire  wealth  —  would  not  be 
removed  by  confiscating  the  large  estates  that  now  exist; 
for  this  would  not  remove  the  causes  of  such  accumulation, 
but  might  rather  intensify  them.  History  furnishes  abun- 
dant evidence  that  whenever  rulers  undertake  to  deprive 
wealthy  subjects  of  their  possessions,  such  uncertainty  as 
to  the  security  of  property  takes  place,  as  to  furnish,  not 
equality  of  opportunity  to  the  common  people,  but  excep- 
tional opportunity  to  the  boldest  and  most  unprincipled 
speculators.  And  if  we  review  the  methods  by  which  for- 
tunes have  been  acquired,  it  does  not  appear  that  men 
would  be  deterred  from  such  acquisitions  by  the  threat  of 
future  confiscation;  on  the  contrary,  the  withdrawal  of 
the  more  scrupulous  might  enable  the  less  scrupulous  to 
make  even  greater  gains.  In  this  view,  justice  would  be 
more  nearly  attained  by  repealing  the  laws  that  prevent 
free  competition  in  acquiring  property,  than  by  confiscat- 
ing property  acquired  through  the  operation  of  such  laws. 

These  arguments,  however,  rest  to  a  great  extent  on  an 
assumption  that  is  disputed.  The  rich  man  may  invest 
judiciously  some  part  of  his  income;  but  he  also  makes 
unwise  investments,  and  he  certainly  uses  some  part  of  his 
wealth  in  unproductive  expenditure.  He  is  tempted  to  dis- 
play his  affluence ;  he  may  build  palaces,  and  keep  many 
carriages,  and  a  large  retinue  of  servants.  Still  it  cannot 
be  assumed  that,  if  his  wealth  were  distributed,  those  who 


UNEARNED  PROPERTY  77 

received  it  would  not  also  use  it  in  building  more  costly 
houses  and  in  keeping  more  carriages  and  servants;  for 
we  know  that  so  soon  as  men  find  themselves  able,  they  are 
apt  to  indulge  in  these  very  forms  of  expenditure.  The 
same  is  true  of  dress  and  of  furniture;  their  expense  al- 
most always  increases  with  income.  On  the  other  side  of 
the  account,  we  find  it  urged  that  rich  men  give  away  vast 
sums  of  money  for  numberless  public  purposes,  as  well  as 
in  their  private  charities;  and  some  of  the  most  liberal 
of  them  have  lived  very  simply.  Were  they  deprived  of 
their  wealth,  it  is  conceivable  that  institutions  which  now 
furnish  opportunities  to  many  poor  people  to  better  their 
condition  would  perish,  and  many  needy  and  helpless  per- 
sons would  become  destitute.  But  there  is  much  evidence 
that  liberality  is  not  less,  in  proportion  to  income,  among 
men  of  moderate  wealth  than  among  the  very  rich;  and, 
if  wealth  were  more  diffused,  there  would  be  less  need  to 
extend  aid  through  eleemosynary  channels,  either  public 
or  private.  While  society  owes  much  in  a  thousand  ways 
to  the  refined  and  enlightened  benevolence  of  the  "  leisure 
class,"  we  cannot  say  how  much  it  might  owe  to  members 
of  other  classes  were  their  leisure  increased. 

On  the  whole,  we  seem  to  be  obliged  to  fall  back  on  the 
general  principles  of  ethics ;  and  if  we  do  so,  there  is  no 
way  of  escape  from  Bentham's  conclusions.  We  must 
admit  that  wealth  is,  taking  all  things  into  consideration, 
a  source  of  happiness  (or  of  welfare,  if  that  term  be  pre- 
ferred) ;  and  that  such  happiness,  in  the  case  of  an  indi- 
vidual man,  does  not  increase  in  proportion  to  the  amount 
of  wealth  that  he  possesses.  It  may  be  maintained  that 
this  proposition  is  not  true  when  the  quantity  of  wealth 
is  small.  A  man  who  cannot  procure  what  is  necessary 


78  THE  METHODS  OF  TAXATION 

to  support  life  must  be  unhappy,  and  to  increase  his  in- 
come might  therefore  increase  his  happiness  out  of  all  pro- 
portion to  the  quantity  of  the  increment.  But  this  does 
not  appear  to  hold  true  after  the  ordinary  desires  and 
tastes  have  been  satisfied.  Even  if  the  attempt  to  arrange 
pleasures  in  a  quantitative  scale  were  to  succeed,  common 
sense  would  never  admit  that  the  feelings  of  one  man 
should  in  practical  affairs  outweigh  those  of  a  thousand 
others.  Men  in  general  unquestionably  believe  that,  if  the 
expenditure  of  wealth  is  pleasurable,  the  quantity  of  pleas- 
urable feeling  —  even  allowing  for  quality  —  is  greater 
when  a  large  number  of  persons  are  able  to  indulge  luxu- 
rious tastes  than  when  the  ability  is  confined  to  a  few. 
Hence  if  the  total  amount  of  wealth  spent  unproductively 
by  a  hundred  persons  would  be  no  greater  than  that  spent 
by  one,  if  he  owned  most  of  it,  the  capital  of  the  community 
would  not  be  impaired,  while  its  happiness  would  be  in- 
creased by  a  more  equal  distribution.  Conceding  that 
great  fortunes  do  not  limit  opportunities  for  the  acquisition 
of  wealth,  at  least  to  the  extent  often  asserted,  and  that 
they  may  even  tend  to  increase  the  aggregate  wealth  of 
the  community,  it  seems  impossible  to  deny  that  their  ex- 
istence is  commonly  believed  to  diminish  the  quantity  of 
happiness  potentially  enjoyable  by  its  members,  if  not  the 
quantity  actually  enjoyed.  This  opinion,  as  we  have  be- 
fore observed,  is  held  by  many  who  do  not  think  sucli 
potential  happiness  to  be  practically  attainable  by  means 
of  taxation ;  or  indeed  by  any  compulsory  system. 

In  this  discussion  we  have  hitherto  ignored  the  existence 
of  family  relations,  and  considered  the  right  of  property 
to  belong  exclusively  to  individuals,  as  some  writers  on  the 
subject,  even  in  modern  times,  and  in  spite  of  such  a  con- 


UNEARNED  PROPERTY  79 

spicuous  fact  as  the  feudal  tenure  of  land,  have  frequently 
done.  But  it  is  now  commonly  maintained  that  this  right 
was  originally  vested  in  communities.  The  Civil  Law  is 
thought  to  have  based  the  right,  in  part  at  least,  on  the  in- 
stitution of  the  family.  The  father  and  the  son  were  re- 
garded as  in  a  sense  one  person,  so  that,  on  the  death  of 
the  one,  the  property  rather  continued  than  descended.  It 
is  certainly  true,  at  the  present  day,  that  men  everywhere 
regard  it  as  the  duty  of  parents  to  provide  sustenance  for 
their  children  until  they  are  able  to  support  themselves, 
and  this  is  commonly  a  legal  obligation.  Hence  the  title 
conferred  by  labor  requires  to  be  somewhat  enlarged. 
Justice  must  authorize  men  to  acquire  by  their  exertions 
wealth  sufficient  for  the  maintenance,  not  only  of  them- 
selves, but  also  of  their  families.  This  obligation,  too,  is 
not  thought  to  terminate  with  life ;  for,  while  men  are  not 
required  by  law  to  accumulate  wealth  on  which  their  fami- 
lies may  live  after  they  die,  they  are  praised  for  doing  so. 
Indeed,  the  advance  of  civilization  may  be  measured  by 
the  extent  to  which  accumulation  for  this  purpose  prevails, 
and  the  encouragement  which  is  given  in  many  ways  by 
law  to  such  accumulation  indicates  that  it  is  commonly 
regarded  as  just. 

The  principle  that  the  labor  of  the  possessor  of  wealth 
constitutes  the  sole  justification  of  his  title  plainly  does 
not  apply  in  this  case.  In  spite  of  the  emphatic  endorse- 
ment given  by  Mill  to  the  right  of  free  acquisition  by 
contract,  he  appears  to  admit  that  those  who  acquire  with- 
out exertion  the  fruits  of  others'  labor  have  but  a  limited 
title.1  Very  young  children  often  possess  wealth  "  trans- 

1  "Private  property,  in  every  defense  made  of  it,  is  supposed  to  mean 
the  guarantee  to  individuals  of  the  fruits  of  their  own  labor  and  absti* 


80  THE  METHODS  OF  TAXATION 

mitted  to  them  without  any  labor  or  exertion  of  their  own," 
and  this  is  true  also  of  those  who  receive  wealth  by  gift, 
as  in  many  cases  no  valuable  consideration  is  returned  by 
them  to  the  giver.  Yet  we  do  not  think  that  justice  for- 
bids us  to  accept  gifts,  for  we  hesitate  to  call  giving  unjust, 
and  are  perhaps  rather  inclined  to  commend  it  as  often 
a  means  of  lessening  the  inequalities  of  fortune.  In  the 
case  of  children,  it  is  obvious  that  if  their  parents  do  not 
provide  for  their  support,  others  must  do  so;  while  by 
means  of  this  parental  support  they  become  capable  of  ren- 
dering services  of  value  to  society.  And  giving  may  be 
defended  by  similar  reasons;  for  the  recipients  of  gifts 
are  often  as  needy  as  children,  and  equally  helpless,  and 
the  gifts  may  enable  them  to  become  self-supporting.  In- 
deed, it  is  on  this  ground  that  our  system  of  free  schools 
is  defended. 

But  while  the  right  to  acquire  and  to  transfer  the  prod- 
ucts of  labor  is  thus  enlarged,  so  as  to  include  more  than 

nence.  The  guarantee  to  them  of  the  fruits  of  the  labor  and  abstinence 
of  others,  transmitted  to  them  without  any  merit  or  exertion  of  their 
own,  is  not  of  the  essence  of  the  institution,  but  a  mere  accidental  conse- 
quence, which  when  it  reaches  a  certain  height,  does  not  promote,  but 
conflicts  with  the  ends  which  render  private  property  legitimate." 
Pol.  EC.,  Book  II,  Chap.  I,  §  3.  Compare  this  with  the  following:  "The 
right  of  property  includes,  then,  the  freedom  of  acquiring  by  contract. 
The  right  of  each  to  what  he  has  produced  implies  a  right  to  what  has 
been  produced  by  others,  if  obtained  by  their  free  consent;  since  the 
producers  must  either  have  given  it  from  good-will,  or  exchanged  it  for 
what  they  esteemed  an  equivalent,  and  to  prevent  them  from  doing  so 
would  be  to  infringe  their  right  of  property  in  the  product  of  their 
own  industry."  Book  II,  Chap.  II,  §  1.  Compare  also  this  proposition: 
"Unlike  inheritance  ab  intestate,  bequest  is  one  of  the  attributes  of  prop- 
erty; the  ownership  of  a  thing  cannot  be  looked  upon  as  complete  with- 
out the  power  of  bestowing  it,  at  death  or  during  life,  at  the  owner's 
pleasure;  and  all  the  reasons  which  recommend  that  private  property 
should  exist,  recommend  pro  tanto  this  extension  of  it."  Ibid.,  §  1.  Mill 
distinguished  limiting  the  capacity  to  take  bequests  from  restricting  the 
power  to  make  them. 


UNEARNED  PROPERTY  81 

suffices  for  the  needs  of  the  individual  producer,  it  is  sub- 
ject to  the  same  limitations.  Society  cooperates  in  the  pro- 
duction of  this  additional  wealth,  and  the  rights  of  children 
and  other  beneficiaries  are  qualified  by  the  claims  of  the 
community.  Whatever  is  necessary  for  the  support  of 
those  who  cannot  support  themselves  must  somehow  be 
provided,  as  a  matter  of  justice ;  for  in  this  country,  and 
in  some  others,  it  may  be  demanded  of  the  state  as  a  legal 
right  We  may  perhaps  go  somewhat  further  in  this  direc- 
tion, as  most  men  probably  do  not  consider  it  just  that 
the  children  of  the  rich,  who  have  been  used  to  a  generous 
mode  of  life,  should  be  reduced  at  once,  on  the  death  of 
their  parents,  to  the  condition  of  the  poor.  But  we  cannot 
go  beyond  this  point  without  encountering  a  widespread 
opinion  that  the  right  of  property  is  extended  too  far,  when 
a  very  great  quantity  is ,  transferred  at  the  death  of  its 
owner  to  persons  who  have  had  no  part  in  producing  it. 
This  is  indicated  by  the  favor  with  which  the  taxes  known 
as  death  duties,  or  transfer,  or  succession,  or  inheritance 
taxes,  are  coming  to  be  regarded.  These  taxes  are  intended 
to  fall  heaviest  on  large  estates,  and  on  those  who  are  pre- 
sumed to  have  had  least  claim  to  be  supported  by  the 
decedent.  Whether  these  taxes  actually  fall  where  they 
are  intended  or  not,  we  cannot  doubt  that  their  purpose 
is  called  just  by  a  large  portion  of  the  community.  As  no 
satisfactory  method  of  diminishing  great  fortunes  during 
the  lives  of  their  possessors  has  been  discovered,  the  in- 
equality, it  seems  to  be  thought,  is  somehow  corrected  by 
preventing  them  from  transmitting  these  fortunes  to  those 
whom  they  wish  to  enjoy  them  after  their  death. 

In  a  society  which  may  be  said  to  be  founded  on  barter, 

where  the  energies  of  the  citizens  are  intensely  devoted  to 

6 


82  THE  METHODS  OF  TAXATION 

bargaining,  and  where  nearly  all  public  servants  demand 
pecuniary  compensation  for  their  services,  it  is  inevitable 
that  the  view  of  justice  proper  to  a  contractual  regime 
should  prevail.  Where  nothing  is  done  except  for  a  con- 
sideration, the  value  of  the  consideration  will  be  closely 
scrutinized;  and  whoever  possesses  much  of  value  for 
which  he  appears  to  have  given  no  consideration,  will  find 
many  to  question  the  validity  of  his  title.  Some  excep- 
tion is  made  in  favor  of  children  and  a  few  other  bene- 
ficiaries ;  "  natural  love  and  affection  "  is  admitted  by  the 
law  as  a  consideration  for  a  grant.  But  these  exceptions 
seem  to  be  made  only  when  small  estates  are  concerned. 
The  great  inequalities  of  wealth  cannot  be  satisfactorily 
explained  as  due  to  corresponding  differences  of  desert; 
and  not  infrequently  wealth  and  desert  seem  to  vary  in- 
versely. As  to  how  much  wealth  any  individual  may  justly 
own,  no  reasoned  convictions  appear  to  prevail.  Million- 
aires would  perhaps  agree  that  no  one  could  justly  possess 
a  hundred  millions,  while  poorer  people  may  question  the 
justice  of  the  millionaire's  title.  Perhaps  the  line  would 
be  drawn  a  little  above  the  amount  of  wealth  sufficient  to 
maintain  a  family  of  average  size  in  comfort,  measured 
by  the  standard  of  the  lower  middle  class.  No  doubt 
greater  possessions  would  often  be  recognized  as  due  to 
greater  desert;  but  this  would  be  less  and  less  true  as 
estates  increased  in  magnitude. 

Indeed,  when  we  consider  all  that  is  implied  in  the  the- 
ory of  political  equality  on  which  our  government  'is 
founded,  it  seems  unreasonable  to  expect  the  "  average 
man "  to  be  sincerely  convinced  that  the  possession  of 
great  wealth  implies  corresponding  desert,  or  excellence. 
Some  superiority  in  capacity,  and  even  in  virtue,  may 


UNEARNED  PROPERTY  83 

be  conceded ;  but  the  good  opinion  which  every  man  natu- 
rally has  of  his  own  deserts  and  abilities  forbids  him  to 
admit  that  his  neighbor  is  a  thousand,  or  a  million,  times 
more  meritorious  than  himself.  Humility  and  self-depre- 
ciation are  not  so  common  as  to  make  it  conceivable  that 
extreme  inequalities  of  wealth  can  ever  be  harmonized 
with  the  theories  of  justice  that  predominate  in  a  democ- 
racy. As  Aristotle  bluntly  says,  those  who  have  the  polit- 
ical power  will  have  their  own  views  of  what  is  just ;  and, 
however  erroneous  these  views  may  seem  to  disbelievers 
in  political  equality,  they  must  be  accepted  as  necessarily 
influencing  the  institutions  of  a  society  founded  on  this 
theory.  It  is  true  that  the  lack  of  desert  on  the  part  of  the 
rich  does  not  logically  imply  its  existence  among  the  poor ; 
the  desert  of  many  of  them  is  a  negative  quantity.  When 
we  come  to  the  problem  of  distribution,  it  is  not  easy  to 
maintain  that  all  the  poor,  without  regard  to  merit,  are  to 
share  in  the  wealth  which  the  government  is  to  take  from 
the  rich.  Indeed,  on  the  theory  that  wealth  must  be  earned  j 
by  service,  men  in  general  have  no  valid  title  to  the  vast 
accumulations  left  by  past  generations;  we  are  obliged 
to  regard  their  inheritance  of  all  the  ages  as  the  gift  of 
nature.  Nor  if  unearned  wealth  is  believed  to  corrupt  the 
morals  of  the  rich,  as  is  sometimes  asserted,  is  it  apparent 
why  it  should  not  have  the  same  effect  on  the  morals  of 
other  classes.  Notwithstanding  these  considerations,  it 
does  not  seem  to  admit  of  question  that  most  men  think 
that  a  more  equal  distribution  than  now  prevails  would 
better  accord  with  justice,  even  if  certain  members  of  the 
community  obtain,  in  the  process,  more  than  they  deserve. 
Before  the  application  of  these  principles  is  considered, 
it  may  be  well  to  restate  briefly  the  conclusions  reached 


84  THE  METHODS  OF  TAXATION 

in  the  last  two  chapters.  We  have  found  that  the  analogy 
drawn  by  Adam  Smith  between  the  members  of  a  body 
politic  and  the  tenants  of  a  great  estate  is  fallacious,  be- 
cause these  members  have  entered  into  no  such  agreement 
as  that  made  by  tenants  with  their  landlord.  Even  if  such 
an  agreement  were  implied,  it  could  bind  only  one  genera- 
tion; and  no  one  contends  that  human  institutions  are 
not  properly  subject  to  alteration.  At  present  the  dis- 
tribution of  wealth  is  admitted  to  be  very  unequal ;  and 
this  is  thought  to  deprive  some  men  of  a  reasonable  oppor- 
tunity to  acquire  wealth.  For  the  theory  of  political  equal- 
ity seems  to  imply  that  men  ought  to  be  able  to  acquire 
equal  quantities  of  wealth.  The  claim  is  made  that  such 
equality  is  unattainable  if  property  is  recognized ;  but  the 
evidence  fails  to  support  this  claim,  and  the  preservation 
of  property  under  the  regime  of  universal  suffrage  indi- 
cates that  it  is  a  permanent  institution.  But  this  does  not 
signify  that  property  may  not  be  modified,  and  if  we  ex- 
amine the  arguments  advanced  in  its  support  we  find  that 
many  limitations  have  been  recognized.  Nothing  is  gained 
by  calling  it  a  natural  right;  but  it  may  be  called  sacred 
in  the  sense  that  men's  possessions  cannot  justly  be  taken 
for  public  use  without  compensation.  Even  in  the  case 
of  property  in  human  beings  this  principle  has  been  recog- 
nized, nor  is  it  really  affected  if  we  admit  the  right  of 
revolution.  It  seems  to  rest  on  two  principles:  that  men 
may  justly  own  the  product  of  their  labor,  and  that  it  is 
just  to  compel  them  to  keep  their  contracts.  In  a  sense, 
occupation  may  be  regarded  as  labor ;  but  strictly  it  seems 
to  give  title  only  to  what  is  needed  for  subsistence.  To 
so  much  wealth  it  gives  an  indisputable  right;  to  more 
than  this  it  gives  no  such  title,  at  least  while  there  are 


UNEARNED  PROPERTY  85 

men  who  cannot  support  themselves  because  others  have  ap- 
propriated more  than  they  need.  But  as  man  is  a  barter- 
ing animal,  civilization  being  impossible  without  freedom 
of  transfer,  title  by  exchange  and  by  prescription  must 
be  recognized ;  and  as  the  condition  of  the  poor  is  always 
miserable  where  any  uncertainty  exists,  justice  is  better 
attained  by  such  recognition.  For  similar  reasons,  men 
must  be  held  to  their  promises  by  force  of  law;  and,  on 
the  other  hand,  rulers  are  restrained  from  making  laws 
that  impair  promises.  Yet  the  promises  of  rulers,  as  they 
may  affect  posterity,  are  less  binding  than  those  of  private 
individuals;  and,  especially  when  made  to  corporations, 
are  accepted  as  subject  to  rather  extensive  modification 
and  revision,  although  not  to  actual  repudiation. 

No  little  ingenuity  has  been  expended  in  the  endeavor 
to  show  that  property  in  land,  or  its  rent,  is  of  a  different 
nature  from  other  property.  This  claim  is  based  on  the 
view  that  land  has  a  value  due  to  scarcity,  and  that  land- 
lords may  deprive  the  rest  of  the  people  of  the  earth  even 
of  standing  room.  Hence  it  has  been  proposed  that  what- 
ever value  land  may  have  because  of  its  scarcity  should 
be  confiscated,  the  rents  being  applied  to  public  uses. 
But  no  practical  scheme  for  distributing  this  value  among 
all  the  inhabitants  of  the  earth  has  been  suggested,  and 
justice  would  not  be  satisfied  by  making  such  distribution 
among  the  dwellers  in  places  where  land  has  exceptional 
value.  In  fact  it  would  be  altogether  impossible  to  ascer- 
tain the  persons  to  whom  particular  lands  may  owe  their 
increased  value,  as  appears  when  we  consider  the  effect 
of  the  construction  of  highways,  etc.  But  the  fundamental 
objection  to  the  claim  is  that  in  so  far  as  value  is  due  to 
scarcity,  there  may  be  an  "  unearned  increment  "  of  value 


86  THE  METHODS  OF  TAXATION 

in  nearly  every  thing  that  is  the  subject  of  property.  It  is 
matter,  rather  than  land,  that  may  be  scarce,  and  advances 
in  the  value  of  personal  property  are  perhaps  more  ex- 
treme than  those  in  the  value  of  real  estate.  On  the  other 
hand,  there  seems  to  be  little  support  for  the  claim  that 
the  expenditure  of  labor  on  matter  creates  an  absolute 
and  indefinitely  transmissible  title,  for  eventually  this 
title  may  be  vested  in  persons  who  have  done  nothing 
whatever  to  earn  it. 

Justice,  however,  appears  to  demand  that  some  consid- 
eration of  benefit  to  society  should  support  property;  and 
the  concept  of  desert  is  in  modern  times  of  increasing 
importance.  Yet  it  seems  vain  to  try  to  measure  desert, 
or  to  lay  down  any  rule  of  proportion  between  desert  and 
wealth.  Were  competition  free,  it  might  be  supposed  that 
men's  wealth  would  measure  the  value  of  their  services; 
but  the  hindrances  to  free  competition  are  innumerable, 
and  perhaps  in  the  nature  of  things  insuperable.  Nor  is 
it  clear  that  the  existence  of  great  wealth  in  the  possession 
of  one  man  decreases  the  wealth,  actual  or  potential,  in 
the  possession  of  others ;  and  in  some  cases  it  is  clear  that 
it  does  not.  But,  if  wealth  is  a  source  of  happiness,  it 
cannot  be  denied  that  the  aggregate  of  happiness  would 
be  greater  when  many  persons  were  wealthy  than  it  would 
be  if  ownership  were  more  concentrated.  These  conclu- 
sions are  subject  to  some  modification  when  we  consider 
that  the  possessor  of  wealth  is  presumptively  a  father  of 
a  family  and  responsible  for  its  support.  But  these  modi- 
fications relate  chiefly  to  estates  of  limited  size,  and 
do  not  materially  alter  the  prevailing  opinion  concerning 
very  great  fortunes.  Hence  there  is  a  manifest  disposi- 
tion to  question  the  right  to  obtain  much  more  than  is 


UNEARNED  PROPERTY  87 

sufficient  for  comfortable  existence  by  gift  or  bequest; 
for  such  property  seems  to  be  peculiarly  "  unearned." 
And  this  tendency  is  likely  to  be  marked  in  a  society  where 
nearly  every  one  may  be  said  to  be  engaged  in  trade,  and 
where  a  consideration  is  looked  for  in  every  transaction. 
When  the  government  of  such  a  society  is  based  on  uni- 
versal suffrage,  it  is  not  to  be  expected  that  the  mass  of 
mankind,  even  if  not  controlled  by  envy,  will  consider  that 
great  wealth  implies  corresponding  desert,  or  will  not  think 
it  just  to  attempt  to  diminish  the  inequalities  of  fortune. 

Admitting  the  prevalent  assumption  that  a  few  men 
possess  much  more  wealth  than  they  have  earned,  and 
that  the  great  majority  possess  much  less  than  they  have 
earned,  it  follows  that,  in  such  a  society  as  ours,  at  least, 
the  principle  of  the  proportionate  method  of  taxation  does 
not  commend  itself  as  fundamentally  just.  Were  our 
government  to  succeed  in  compelling  its  subjects  to  con- 
tribute to  its  expense  in  proportion  to  the  revenues  that 
they  respectively  enjoy  under  its  protection,  the  chief 
ground  of  complaint  would  still  remain.  If  the  revenues 
of  individuals  are  to  be  considered  in  levying  taxes,  it 
seems  clear  that  the  progressive,  rather  than  the  propor- 
tionate method  is  ideally  just.  The  ratio  of  contribution 
should  increase  geometrically,  not  arithmetically;  every 
increment  of  wealth  beyond  a  certain  quantity  being  re- 
garded as  earned,  in  part  at  least,  by  the  members  of  the 
society  collectively,  and  not  wholly  by  the  individual  in 
whom  the  legal  title  to  it  is  vested.  No  doubt,  as  we  have 
seen,  the  qualification  of  desert  is  to  some  extent  ignored 
in  the  process  of  distribution;  all  the  poor,  irrespective 
of  merit,  are  to  be  relieved  of  a  part  of  their  burden.  But 
the  rain  falls  on  the  just  and  on  the  unjust,  and  in  prac- 


88  THE  METHODS  OF  TAXATION 

tice  the  injustice  of  benefiting  the  worthless  is  disregarded, 
if  it  is  unavoidable  when  we  would  reward  the  deserving. 

It  is  obvious,  however,  that  we  beg  the  question  if  we 
assume  that  an  ideal  distribution  of  wealth  can  be  pro- 
duced by  means  of  taxes.  We  cannot  even  assume  that 
greater  equality  of  fortunes  can  be  so  produced.  Such 
attempts  may  but  aggravate  the  evil  which  they  are  meant 
to  cure,  and  create  more  inequality  than  they  remove. 
Before  we  adopt  any  conclusion  on  such  a  subject,  we 
must  inquire  what  is  to  be  learned  from  experience.  Now 
it  is  evident  that,  for  the  strict  application  of  either  of  the 
first  two  methods,  it  is  indispensable  that  the  government 
should  ascertain  the  amount  of  the  wealth,  or  of  the 
revenue,  of  every  subject.  Without  this  information  it 
is  plainly  impossible  to  graduate  taxation  either  propor- 
tionally or  progressively.  If  it  cannot  be  obtained  for  the 
one  purpose,  it  cannot  for  the  other;  and  unless  it  is 
obtained,  we  cannot  say  that  justice  is  promoted  by  either 
method.  Of  the  progressive  method  we  have  had,  in  this 
country,  but  little  experience,  while  the  proportionate 
method  has  been  employed,  nominally  at  least,  in  all  our 
states.  We  may  therefore  proceed  to  inquire  how  far  its 
application  has  in  practice  resulted  in  the  attainment  of 
its  ideal ;  and,  in  so  far  as  it  has  failed,  how  far,  from  the 
same  causes,  the  progressive  method  must  also  fail. 


CHAPTER   IV 

PRACTICAL  APPLICATIONS  OF  THE  PROPORTIONATE 
METHOD 

WERE  it  generally  admitted  that  wealth  consists  only 
in  material  things,  and  were  ownership  limited  to  things 
within  the  jurisdiction  of  the  government  to  which  the 
owners  are  subject,  it  might  be  practicable  to  apply  the 
proportionate  method  without  inquiry  into  the  circum- 
stances of  individuals.  For  all  wealth  being  taxed  at  a 
certain  ratio,  every  individual  owner  would  presumptively 
contribute  his  proportionate  share.  The  immense  number 
of  rights  of  property  which,  although  invisible  and  in- 
tangible, are  commonly  regarded  as  wealth,  and  the  ex- 
tension of  these  rights  into  remote  jurisdictions,  make  this 
simple  solution  unavailable.  In  the  alternative,  the  amount 
of  the  possessions  of  every  individual  must  be  ascertained. 
Whether  he  is  to  be  taxed  according  to  a  simple  or  a 
progressive  ratio,  the  total  quantity  of  his  property  must 
be  known  to  the  tax-gatherer  before  the  ratio  can  be  ap- 
plied in  practice.  Without  this  knowledge  the  ratio  would 
be  altogether  indeterminate,  and  its  application  could  be 
just  only  by  chance. 

Various  methods  of  obtaining  this  necessary  information 
have  been  resorted  to  by  rulers,  but  they  can  all  be  ar- 
ranged in  two  classes.  Inspection  or  examination  by  others 
than  the  owners  of  the  property  to  be  assessed  is  one 
method;  disclosure,  or  confession,  by  the  owners  is  the 
other.  The  methods  may  be  combined,  and  both  are  in 


90  THE  METHODS  OF  TAXATION 

common  use.  A  modification  of  the  method  of  inspection 
appears  in  the  practice  of  inferring  that  the  possessor  of 
certain  property  is  the  possessor  of  other  kinds,  and  espe- 
cially that  he  who  indulges  in  what  are  deemed  luxuries 
must  have  an  income  corresponding  with  this  expenditure. 
Such  inferences  may  conceivably  be  valid  and  useful ;  but 
we  shall  find  that  as  ordinarily  drawn  they  are  too  con- 
jectural to  be  regarded  as  meeting  the  requirements  of 
justice. 

In  a  community  where  agriculture  is  the  chief  industry, 
where  the  habits  of  life  are  simple,  the  quantity  of  wealth 
small,  and  commerce  insignificant,  it  is  conceivable  that 
the  assessors  of  taxes  may  form  by  inspection  approxi- 
mately correct  judgments  of  the  value  of  the  property  of 
every  citizen.  Such  wealth  as  exists  is  nearly  all  visible,  it 
is  situated  within  the  geographical  limits  of  the  commun- 
ity, and  it  is  not  subject  to  frequent  changes  of  ownership. 
These  having  been  in  earlier  times  the  conditions  prevail- 
ing in  the  states  of  this  Union,  the  measure  known  as  the 
general  property  tax  was  universally  adopted.  By  this 
measure  every  person  is  assessed  annually  at  the  place  of 
his  residence  for  all  real  estate  owned  by  him  in  that 
place,  and  usually  for  all,  or  almost  all,  personal  property 
owned  by  him,  wherever  it  may  be.  Real  estate  owned 
by  nonresidents  is  taxed  where  it  is  situated.  Under  this 
system  it  is  obvious  that,  so  far  as  regards  real  estate, 
while  the  several  assessors  may  be  ignorant  of  the  amount 
owned  by  any  person,  he  would  yet  be  taxed  on  the  whole 
of  his  possessions.  So  far  as  real  estate  is  concerned, 
therefore,  the  general  property  tax  would  conform  to  the 
proportionate  method  of  taxation;  but  unless  the  knowl- 
edge obtained  by  the  assessors  of  the  several  communities 


THE  PROPORTIONATE  METHOD  91 

were  communicated  to  the  whole  body,  the  progressive 
method  could  not  be  applied. 

For  reasons  which  will  presently  be  explained,  it  has 
in  many  states  been  thought  necessary  to  supplement  the 
method  of  inspection  by  the  method  of  disclosure,  or  self- 
assessment.  In  these  states,  owners  of  property  are  di- 
rected by  statute  to  report  to  the  assessors  all  their  pos- 
sessions, with  their  value,  and  to  swear  that  their  reports 
are  true.  In  some  states  such  reports  are  required  only 
when  the  taxpayer  objects  to  the  valuation  put  on  his 
property  by  the  assessor,  but  in  other  states  every  one  is 
commanded  to  make  them,  under  penalties  of  varying  de- 
grees of  severity.  As  this  requirement  of  a  sworn  return 
was  very  early  introduced,  it  is  probable  that  the  method 
of  inspection  was  even  then  found  insufficient. 

But  whether  the  method  was  satisfactory  or  not  in  a 
primitive  state  of  society,  it  long  since  ceased  to  be  avail- 
able, as  to  personal  property,  in  most  parts  of  this  coun- 
try. The  population  of  the  cities  has  enormously  increased, 
manufactures  have  everywhere  sprung  up,  commerce  has 
advanced  with  prodigious  strides,  and  all  industrial  trans- 
actions have  been  wonderfully  quickened.  Property  has 
taken  on  many  new  forms,  and  is  little  affected  by  spatial 
limitations.  The  fact  that  a  rich  man  resides  in  a  particu- 
lar town  and  a  particular  state  establishes  but  a  slight 
presumption  that  much  of  the  property  from  which  he 
derives  an  income  is  situated  in  that  town  or  in  that  state. 
He  may  own  land  in  every  state  in  the  union,  and  he  may 
be  a  creditor  of  the  British  Government,  or  the  empire 
of  Japan.  Under  such  conditions  the  method  of  inspec- 
tion does  not  produce  an  equal  distribution  of  the  burden 
of  taxation.  Such  persons  as  have  property  only  at  the 


92  THE  METHODS  OF  TAXATION 

place  of  their  residence  are  practically,  as  a  rule,  assessed 
at  a  higher  rate  than  those  whose  property  is  situated 
elsewhere.  The  assessors  may  be  able  to  discover  the 
existence  of  the  property  belonging  to  the  former  class, 
but  to  discover  that  of  the  latter  is  in  most  cases  quite 
beyond  their  power. 

The  essential  differences  between  real  and  personal 
property,  and  between  visible  personalty  and  choses  in 
action,  or  invisible  and  intangible  rights,  have  become 
much  more  conspicuous  as  the  modern  economic  system 
has  developed;  but  some  of  them  have  been  always  ob- 
servable. In  the  first  place,  land  is  visible  and  immovable. 
The  tax-gatherer  and  every  other  person  can  see  it,  and 
the  owner  cannot  remove  it,  or  hide  it.  Certain  kinds  of 
personal  property  are  visible;  but  they  can  be  removed 
and  concealed.  Title  to  such  property  passes  by  delivery, 
and  nowadays  with  great  frequency.  The  same  things 
may  be  owned  by  several  persons  on  the  same  day,  and 
by  a  hundred  persons  in  the  same  year.  Into  the  daily 
consumption  of  an  inhabitant  of  any  city  there  enter  mate- 
rials drawn  from  every  part  of  this  country  and  from 
every  quarter  of  the  earth.  The  bread  that  he  buys  of  the 
baker  is  made  from  flour  that  the  baker  bought  from  the 
jobber,  and  the  jobber  from  the  wholesale  dealer  or  the 
miller.  The  miller  ground  it  from  wheat  that  may  have 
been  bought  and  sold  many  times  after  it  was  harvested, 
or  even  before  it  was  taken  from  the  field.  Within  a  few 
months  the  same  particles  of  matter  have  been  owned  for  a 
brief  period  by  many  different  persons  residing  in  many 
different  jurisdictions,  some  of  whom  may  have  never  seen, 
or  been  within  a  thousand  miles  of,  their  property.  Bread, 
however,  is  very  simple  in  its  composition  compared  with 


THE  PROPORTIONATE  METHOD  93 

clothing  and  many  other  things  in  common  consumption, 
the  materials  of  which  may  have  been  within  a  twelve- 
month the  property  of  an  incalculable  number  of  persons. 

As  it  is  evidently  impossible  for  the  assessors  to  dis- 
cover all  these  titles  by  inspection,  personal  property  of 
this  kind  is  taxed  under  the  general  law,  like  real  estate, 
only  once  a  year.  Real  estate,  however,  is  comparatively 
seldom  transferred,  and  when  a  sale  takes  place  the  rents 
and  taxes  can  be  apportioned.  The  value  of  the  building 
in  which  a  merchant  carries  on  his  trade,  and  that  of  the 
land  on  which  it  stands,  can  be  ascertained  by  the  assessor, 
and  by  every  one  else,  without  very  great  difficulty.  That 
value  is  nearly  the  same  on  every  day  of  the  year,  and 
varies  slowly,  as  a  rule,  from  year  to  year.  But  the  value 
of  the  stock  of  goods  which  the  merchant  has  on  hand 
cannot  be  easily  ascertained.  He  can  seldom  determine 
it  precisely  himself,  although  no  one  else  can  determine 
it  near  so  well.  It  is  not  the  same  on  any  two  days,  nor 
in  any  two  months;  and  it  may  be  very  different  on  the 
day  when  the  assessor  makes  his  inspection  from  what  it 
is  on  any  other  day  of  the  year.  Nevertheless  the  mer- 
chant is  usually  taxable  for  its  value  on  that  day,  while 
the  thousand  persons  who  have  owned  it  within  a  year 
are  exempt.  It  may  be  presumed  that  these  persons  are 
taxed  as  owners  of  some  equivalent  for  the  property  which 
they  have  sold,  but  the  presumption  is  very  slight.  Such 
equivalent,  even  if  at  the  time  open  to  inspection,  may 
have  since  altogether  disappeared. 

For  much  personal  property,  although  tangible,  is  evan- 
escent. It  comes  into  being,  undergoes  many  transforma- 
tions, and  is  consumed  within  a  year.  The  wheat  grown 
from  the  seed  sown  in  the  spring  may  be  eaten  before 


94  THE  METHODS  OF  TAXATION 

winter,  and  if  the  date  of  assessment  falls  in  the  winter, 
it  will  not  be  taxed  either  as  wheat  or  flour  or  bread. 
The  same  is  true  in  various  degrees  of  the  other  cereals, 
of  fruits  and  flowers,  of  fuel,  and  of  everything  which 
is  used  up  in  satisfying  human  wants  and  purposes.  The 
milk  of  a  cow  during  a  year  may  amount  to  3,000  quarts, 
and  be  worth  $200;  but  neither  the  dairyman,  the  milk- 
dealer,  nor  the  consumer,  all  of  whom  have  owned  the 
milk,  may  be  taxed  for  his  ownership  therein.  As  the 
general  property  tax  is  commonly  assessed,  only  the  most 
bulky  and  durable  objects  are  actually  subjected  to  inspec- 
tion; and  objects  of  the  greatest  value,  such  as  jewels,  al- 
though durable  and  intended  especially  for  display,  do 
not  fall  within  the  assessor's  range  of  vision. 

The  difficulty  of  the  assessors'  task  is  very  greatly  in- 
creased by  the  division  of  our  country  into  states  that  are, 
so  far  as  taxation  is  concerned,  mutually  independent. 
The  dates  fixed  for  the  valuation  of  property  vary  in  the 
different  jurisdictions,  so  that  a  carload  of  wheat  might 
be  moved  through  four  or  five  states  and  escape  taxation 
in  every  one  of  them;  or,  if  its  movements  were  properly 
timed,  it  might  be  taxed  in  all  of  them.  The  farmer  who 
produced  the  wheat  may  have  exchanged  it  for  a  carload 
of  fertilizer,  which  might  experience  the  same  vicissitudes. 
According  to  the  judgment  displayed  in  managing  such, 
transfers  —  and  the  case  supposed  is  by  no  means  merely 
hypothetical  —  the  value  of  the  goods  may  be  very  con- 
siderably reduced  or  enhanced.  We  accordingly  observe 
great  activity  in  the  movement  of  merchandise  out  of  a 
state  as  the  date  of  assessment  approaches,  while  imports 
appear  to  be  stimulated  so  soon  as  this  date  is  passed.  It 
is  obvious  that  the  owners  of  this  merchandise  do  not 


THE  PROPORTIONATE  METHOD  95 

intend  to  be  taxed  on  what  they  have  received,  or  are  to 
receive,  from  its  sale.  Were  they  to  be  so  taxed,  the  mo- 
tive for  hurrying  the  export  would  not  exist,  and  the 
presumption  is  that  neither  the  goods  exported,  nor  those 
for  which  they  are  exchanged,  are  subjected  to  taxation. 
Similar  activity  in  the  transfer  of  money  and  deposits  in 
banks  takes  place  as  the  date  of  assessment  approaches; 
capital  being  actually  removed  from  the  state,  or  employed 
in  the  purchase  of  securities  exempt  from  taxation.  Riches 
often  have  wings,  and  at  the  stroke  of  a  pen  may  be  made 
to  fly  to  the  uttermost  parts  of  the  earth. 

But  if  the  assessment  of  tangible  personal  property  is 
difficult  and  incomplete,  that  of  intangible  property  is 
frequently  altogether  impossible.  Such  property  cannot 
be  perceived  by  the  senses,  and  the  knowledge  of  its  ex- 
istence may  be  confined  to  -very  few  persons.  In  certain 
cases  its  existence  is  made  apparent  by  public  records, 
but  most  claims  and  credits  are  known  only  to  the  parties 
concerned.  A  minute  and  inquisitorial  examination  may 
sometimes  enable  the  assessor  to  assign  a  correct  value  to 
the  goods  of  a  merchant;  but  no  inspection  within  his 
power  will  inform  him  of  the  extent  of  the  claims  which 
the  merchant  has  on  the  property  of  others,  or  of  those 
which  others  have  on  his  property.  Some  paper  evidences 
of  obligations  may  be  discovered,  to  which  there  are  no 
offsets,  but  such  discoveries  are  not  likely  to  be  very  ex- 
tensive unless  the  owner  of  the  claims  lends  his  aid;  and 
the  number  of  small  claims  evidenced  by  no  written  obli- 
gation is  in  the  aggregate  enormous. 

The  modern  practice  of  carrying  on  business  with  bor- 
rowed capital,  commonly  spoken  of  as  the  credit  system, 
has  made  personal  property  rights  far  more  intricate  than 


96  THE  METHODS  OF  TAXATION 

they  were  originally,  and  has  correspondingly  increased 
the  difficulty  of  assessing  them  for  taxation.  The  function 
of  credit  is,  to  the  eyes  of  the  ordinary  observer,  com- 
pletely disguised  by  the  employment  of  money;  but  it 
is  demonstrable  that  in  most  of  the  operations  of  produc- 
tion and  exchange,  what  is  borrowed  is,  in  the  last  analy- 
sis, something  material.  This  tangible  capital,  however, 
is  the  basis  of  a  number  of  credits.  The  person  who  owns 
it  lends  it  to  another;  or,  what  is  the  same  thing,  gives 
him  an  order  that  will  insure  him  its  possession.  But 
this  order  may  be  transferred  by  the  first  borrower,  or 
he  may  pledge  it  as  security  for  another  loan  from  a  dif- 
ferent lender,  and  the  process  may  be  indefinitely  extended. 
The  tangible  capital,  meanwhile,  may  never  leave  the  pos- 
session of  the  original  owner,  and  he  may  be  repaid 
eventually  by  the  confirmation  of  his  possession.  But  so 
long  as  his  order  is  outstanding,  his  property  in  this 
capital  is  only  nominal;  the  right  to  it  is  elsewhere,  per- 
haps in  many  unknown  hands  and  evidenced  by  many 
instruments  of  credit.  On  the  other  hand,  the  lender  may 
deliver  the  capital  when  the  loan  is  originally  made,  and 
never  demand  its  return.  He  may  be  satisfied  with  the 
promise  of  the  borrower,  and  this  promise  he  may  lend, 
or  on  its  security  he  may  borrow. 

The  nature  of  this  complicated  process  may  be  illus- 
trated by  an  example.  A  merchant  may  borrow  a  thou- 
sand dollars  from  a  bank,  pledging  the  bond  of  some  cor- 
poration for  the  same  amount  as  security.  The  bank  thus 
acquires  a  right  of  property  either  in  the  other  possessions 
of  the  borrower,  or  in  the  bond,  or  in  both.  The  borrower 
acquires  a  right  of  property  in  the  possessions  of  the  bank, 
as  he  does  not  remove  the  thousand  dollars  from  its  cus- 


THE  PROPORTIONATE  METHOD  97 

tody,  but  accepts  an  order  for  them  in  the  shape  of  a 
credit  in  his  account.  There  has  been  no  addition  to  the 
tangible  wealth  of  the  community;  but,  in  the  eye  of  the 
law,  personal  property  has  increased  by  the  sum  of  a 
thousand,  or  two  thousand  dollars,  and  in  many  states 
such  property  is  taxable.  Nor  does  the  transaction,  so 
far,  increase  the  wealth  either  of  the  bank  or  the  customer, 
since  it  amounts  merely  to  balancing  one  claim  against 
another,  the  interest  on  the  bond  being  assumed  to  equal 
the  interest  on  the  loan.  But  the  bond  is  evidence  of  a 
property  right,  and  is  taxable,  and  so  are  the  thousand 
dollars  in  the  possession  of  the  bank.  This  thousand  dol- 
lars may  itself  be  nothing  but  the  paper  promise  of  the 
government  to  pay  that  sum,  secured  by  the  wealth  of  the 
whole  people,  on  which  they  are  taxed;  and  the  bond 
may  be  secured  by  the  pledge  of  the  stock  of  another 
corporation.  This  also  is  in  many  cases  taxable  personal 
property,  while  the  tangible  possessions  of  the  corporation 
are  also  taxed.  Thus,  on  the  basis  of  material  wealth 
having  a  value  of  a  thousand  dollars,  there  have  been 
created  personal  property  rights  having  ten  times  that 
value  in  the  view  of  the  law,  which  accordingly  subjects 
them  to  taxation. 

The  fact  that  such  rights  are  extensively  created  no 
doubt  proves  that  some  economic  gain  results  from  their 
creation.  But  it  also  proves  that  the  law  is  not  enforced, 
for  no  conceivable  gain  from  such  transactions  would  come 
near  to  make  up  for  the  loss  from  taxation,  were  the  tax 
actually  paid.  In  the  ordinary  course  of  business,  no  one 
borrows  who  does  not  expect  to  make  a  profit  by  doing  so, 
after  paying  interest  on  the  loan;  but  the  current  rate 
of  profit  is  far  from  sufficient  to  pay  the  rate  of  taxation 

7 


98  THE  METHODS  OF  TAXATION 

nominally  current  on  personal  property.  Since  the  tangible 
property  which  is  the  basis  of  numberless  credits  is  taxed 
at  this  rate,  it  seems  impossible  to  tax  all  the  credits  at 
the  same  rate;  and  whether  possible  or  not  in  theory,  it 
is  evident  that  in  practice  most  of  these  credits  must 
escape  the  observation  of  the  assessor. 

That  these  conclusions  are  correct  seems  to  be  demon- 
strated by  the  records  of  the  financial  markets.  A  very 
large  part  of  personal  property  of  the  intangible  kind 
consists  of  claims  evidenced  by  bonds  for  the  payment  of 
money,  and  many  of  these  bonds  are  openly  bought  and 
sold  on  the  exchanges,  their  prices  being  regularly  quoted. 
Some  of  these  bonds,  as  those  of  the  United  States,  are, 
by  the  terms  of  the  law  authorizing  their  issue,  exempt 
from  taxation  everywhere  in  this  country;  many  others 
are  exempt  within  more  or  less  limited  jurisdictions. 
Owing  to  certain  provisions  in  the  currency  laws,  govern- 
ment bonds  have  for  banks  a  quite  exceptional  value,  the 
extent  of  which,  however,  is  so  difficult  to  determine  pre- 
cisely as  to  make  it  unsafe  to  use  the  price  of  these  bonds 
in  drawing  our  inferences.  Other  non-taxable  bonds,  how- 
ever, sell  at  prices  not  much  higher  than  those  of  taxable 
bonds  of  approximately  equal  security.  The  income  de- 
rived from  a  first  rate  bond,  if  the  ordinary  tax  on  it 
were  paid  by  its  owner,  would  often  be  no  more  than  half 
that  derived  from  an  untaxed  bond ;  but  the  market  values 
of  such  bonds  may  not  differ  more  than  a  fraction  of  one 
per  cent.  No  doubt  many  bonds  are  held  by  institutions, 
such  as  savings  banks,  not  liable  to  taxation  upon  them; 
but  the  quantity  in  the  possession  of  individuals  is  enor- 
mous. The  quantity,  however,  found  by  the  assessors 
to  be  in  such  possession  is  very  trifling.  Men  who  hold 


THE  PROPORTIONATE  METHOD  99 

such  securities  in  trust  are  aften  subjected  to  taxation. 
Men  who  hold  them  as  their  own  property  evidently,  as 
a  rule,  have  no  intention  of  paying  taxes  on  them.  They 
are  sometimes  compelled  to  do  so,  in  spite  of  their  in- 
tentions; but  the  prices  which  these  securities  steadily 
command  show  that  such  payments  are  exceptional. 

While  it  is  evident  that  inspection  fails  to  discover  the 
ownership  of  much  personal  property  of  this  description, 
it  is  impossible  to  ascertain  the  extent  of  the  failure. 
Even  if  it  were  practicable  to  learn  the  rate  of  taxation 
in  every  taxing  district,  it  would  be  of  little  service,  be- 
cause the  assessed  value  of  property  has  no  determinable 
relation  to  its  market  value.  By  comparing  a  number  of 
places,  we  may  perhaps  obtain  an  average  rate,  but  we 
can  only  conjecture  it  to  be  generally  prevalent.  In  some 
places  the  rate  of  taxation  is  much  less  than  one  per  cent ; 
in  others  it  is  three  or  four  times  as  much.  It  is  prob- 
able that  where  the  rate  of  taxation  is  very  low,  a  greater 
proportion  of  bonds  is  taxed  than  where  it  is  high;  but 
we  know  that  rich  men  generally  reside  in  cities  where 
a  low  rate  of  taxation  seldom  prevails.  Bonds  issued  by 
well-known  corporations  are  frequently  scattered  through 
all  the  states,  and  large  numbers  of  them  are  owned  in 
foreign  countries.  The  value  of  bonds  so  owned  would 
not  be  much  affected  by  the  fact  that  they  were  free  from 
taxation  in  the  state  where  they  were  issued. 

In  many  communities  assessors  make  no  attempt  to 
discover  the  owners  of  this  kind  of  property,  and  if  a 
bond  is  practically  untaxed,  its  value  would  be  little  in- 
creased were  it  exempt  by  law.  It  might  seem  that  some 
definite  conclusion  on  this  point  could  be  reached  by  as- 
certaining the  amount  of  bonds  actually  extant,  and  com- 


100  THE  METHODS  OF  TAXATION 

paring  it  with  the  amount  of  personal  property  of  this 
kind  returned  by  the  assessors  throughout  the  country. 
Were  it  possible  to  obtain  trustworthy  figures,  which  it 
is  not,  such  an  investigation  would  be  inconceivably  labori- 
ous, and  it  would  be  vitiated  by  our  inability  to  discover 
the  extent  of  foreign  ownership.  It  would  be  futile,  also, 
because  of  the  great  quantity  of  bonds  held  by  numberless 
institutions  exempt  from  taxation,  for  whom  non-taxable 
bonds  have,  of  course,  no  peculiar  value. 

We  have  so  far  referred  chiefly  to  bonds  made  payable 
to  bearer  and  transferable  by  delivery.  These  bonds  are 
issued  almost  exclusively  by  corporations,  they  usually 
have  many  years  to  run,  and  they  are  practically  the  only 
bonds  dealt  in  on  the  exchanges.  But  the  value  of  bonds 
made  chiefly  by  individuals,  for  relatively  short  periods, 
and  payable  to  specified  persons,  is  collectively  enormous. 
As  these  bonds  are  almost  invariably  secured  by  mortgages 
of  real  estate,  they  are,  under  our  system  of  making  title 
to  land  depend  on  record,  necessarily  registered.  It  fol- 
lows that  when  a  mortgage  is  made  to  any  one  residing 
within  the  registration  district,  the  assessors  may  be  able 
to  discover  the  owner  of  the  bond  by  a  mere  inspection  of 
the  record.  But  when  the  mortgage  is  made  to  a  non- 
resident, and  especially  when  the  mortgagee  resides  in  an- 
other state,  it  seldom  happens  that  the  assessors  where  he 
resides  discover  this  record,  nor  are  they  often  able  to 
carry  on  investigations  outside  of  their  jurisdiction  on  the 
chance  of  occasionally  making  such  a  discovery.  The 
method  of  inspection  leads  to  great  inequalities  in  the 
assessment  of  all  kinds  of  intangible  property,  but  in  the 
case  of  mortgage  bonds  of  this  description  the  injustice  is 
peculiarly  aggravated.  It  is  probable  that  persons  residing 


THE  PROPORTIONATE  METHOD         it)! 

where  real  estate  is  situated  will  be  better  able  than  non- 
residents to  judge  of  its  value,  and  will  therefore  be  more 
willing  to  lend  on  its  security.  But  this  method  of  taxation 
discriminates  against  such  loans,  and  thus  compels  bor- 
rowers to  seek  accommodation  in  other  places.  On  the 
other  hand,  residents  are  under  a  strong  inducement  to 
invest  their  capital  elsewhere;  an  inducement  to  which 
they  yield  to  a  notorious  extent,  although  with  frequently 
disastrous  results,  as  many  residents  of  the  Eastern  states 
can  testify. 

This  inequality  is  still  further  aggravated  by  the  fact 
that  property  held  in  trust  for  helpless  and  incompetent 
persons  is  usually  required  by  law  to  be  invested  within 
particular  jurisdictions,  and  is  thus  more  open  to  the  in- 
spection of  the  assessors.  The  accounts  of  executors  and 
trustees  are  to  a  considerable,  extent  matters  of  record,  and 
as  the  property  which  they  administer  is  frequently  di- 
rected by  testators,  and  practically  also  by  the  laws  regu- 
lating trusts,  to  be  invested  in  bonds  made  by  individuals, 
all  their  transactions  may  be  examined.  When  estates  are 
settled,  it  is  often  necessary  for  executors  to  take  bonds 
secured  by  real  estate  situated  where  they  reside,  and  such 
bonds  can  seldom  escape  taxation.  As  they  are  assessed 
at  their  face  value,  while  real  estate  is  generally  assessed 
at  much  less  than  its  market  value,  the  rate  of  taxation 
frequently  amounts  to  one  half  of  the  rate  of  interest  which 
the  bond  bears,  and  sometimes  to  the  whole  of  it.  Cases 
of  extreme  hardship  to  lunatics,  infants,  and  widows  can 
hardly  fail  to  arise  under  such  circumstances,  and  they 
are  in  fact  of  frequent  occurrence.  It  must  be  admitted, 
therefore,  that  the  general  property  tax,  so  far  as  it  de- 
pends on  the  inspection  of  assessors,  is  assessed  with  the 


102  THE  METHODS  OF  TAXATION 

greatest  inequality,  and  falls  with  exceptional  severity  on 
those  who  are  least  able  to  bear  it. 

Such  inequality  has  naturally  attracted  much  attention, 
and  its  effects  have  been  repeatedly  investigated.  The 
amount  of  evidence  thus  accumulated  is  enormous,  and  it 
would  be  quite  impracticable  even  to  enumerate  the  re- 
ports that  have  been  made.  As  the  conditions  disclosed  are 
very  much  the  same  in  the  different  states,  we  may  take 
for  illustration  the  results  presented  by  a  special  commis- 
sion appointed  by  the  General  Assembly  of  Connecticut. 
Although  this  report  was  made  in  1887,  later  inquiries  in 
Connecticut  and  elsewhere  have  shown  that  the  same  con- 
ditions still  exist.  So  long  ago  as  in  1844  a  legislative 
committee  reported  that  more  than  one  third  of  the  per- 
sonal property  owned  in  the  state  paid  no  taxes.  This 
opinion  was  based  in  part  on  comparisons  made  between 
the  inventories  of  the  estates  of  decedents  returned  to  the 
Probate  Courts,  and  the  tax-lists  of  the  same  persons  for 
the  year  preceding  their  decease.  Adopting  the  same 
method,  the  later  commission  selected  six  Probate  Dis- 
tricts, each  in  a  different  county,  and  subjected  some  five 
hundred  estates  to  careful  scrutiny.  In  one  of  these  dis- 
tricts the  amount  of  taxable  property  inventoried  was  about 
$7,000,000,  while  the  amount  appearing  on  the  tax-lists  of 
the  same  persons  was  $1,581,000.  It  would  seem  that  in 
this  district  77  per  cent  of  the  taxable  property  was 
untaxed;  in  other  districts  the  percentage  ranged  from 
45  to  80.  A  part  of  the  discrepancy,  however,  is  explained 
as  due  to  the  fact  that  real  estate  is  generally  inventoried 
at  a  higher  valuation  than  that  of  the  assessors.  Making 
allowance  for  this,  it  would  seem  that  at  least  one  half  of 
the  personal  property  passing  through  the  Probate  Courts 


THE  PROPORTIONATE  METHOD          103 

had  not  been  taxed  while  the  owner  was  living.  In  some 
other  states  tax  commissioners  have  estimated  that  three 
fourths  of  all  personal  property  is  not  taxed. 

Further  inquiry  in  Connecticut  proved  that  such  per- 
sonal property  as  paid  taxes  at  all  was  chiefly  of  a  tangible 
nature.  Deducting  such  property,  as  well  as  the  capital 
stock  of  moneyed  corporations,  all  the  intangible  property 
in  the  state  was  found  to  be  but  four  per  cent  of  the 
grand  list.  There  are  167  towns  in  the  state,  and  in 
81  of  them  not  a  single  bond  was  assessed  for  taxation. 
Meriden  is  a  considerable  town ;  but  no  bonds  were  listed 
there.  Waterbury  is  thought  to  be  a  rich  city;  but  its 
citizens  appeared  to  possess  bonds  only  to  the  amount  of 
$750.  Some  of  the  financial  officers  of  the  general  gov- 
ernment are  fond  of  computing  the  amount  of  money  in 
circulation  in  the  country.  .In  1885  this  was  declared  to 
be  about  $23  per  caput,  and  the  share  of  Connecticut 
(which,  however,  must  have  been  far  greater  than  the 
average)  would  have  been  perhaps  $16,000,000.  But, 
according  to  the  assessors'  returns,  the  money  in  possession 
of  the  people  of  that  state  was  but  $1,100,000,  and  in 
forty-three  towns,  some  of  them  not  unimportant,  there 
was  no  money  at  all.  Taking  the  items  of  bonds,  notes, 
money  at  interest,  and  cash,  it  appears  that  while  in  1855 
they  had  amounted  to  $19,186,000,  and  in  1865  to  $20,- 
521,000,  they  had  fallen  in  1885  to  $13,208,000.  In  view 
of  the  enormous  investments  during  this  period  in  rail- 
road and  other  bonds,  and  in  Western  mortgage  loans,  this 
record  is  peculiarly  impressive. 

For  it  is  to  be  observed  that  these  results  took  place 
while  the  method  of  disclosure  as  well  as  that  of  inspection 
was  in  use.  Taxpayers  seem  to  have  been  always  required 


104  THE  METHODS  OF  TAXATION 

to  make  out  lists  of  all  their  property,  and  since  1850  have 
been  obliged  to  swear  to  the  truth  of  these  lists.  In  addi- 
tion to  the  penalty  of  perjury,  forfeiture  of  goods  has  been 
resorted  to ; 1  but  conviction  for  perjury  of  this  kind  is 
unheard  of,  and  the  forfeitures  have  been  extremely  in- 
significant in  amount.  The  amount  of  intangible  property 
returned  for  taxation  does  not  appear  to  be  affected, 
whether  the  law  makes  a  false  return  punishable  as  per- 
jury or  not,  nor  does  the  dread  of  confiscation  appear  to 
have  any  strength  as  a  motive.  Making  due  allowance  for 
intangible  property  disclosed  by  the  accounts  of  trustees, 
it  seems  hardly  too  much  to  say  that  very  few  owners  of 
such  property  in  Connecticut  are  not  guilty  of  false  swear- 
ing in  making  out  their  lists.  Such  matters  are  too  deli- 
cate to  be  discussed  in  public,  but  in  private  conversation 
the  resort  to  such  practices,  while  it  may  be  deplored,  is 
regarded  as  a  necessary  mitigation  of  the  inequality  created 
by  the  law. 

1  Early  in  the  eighteenth  century  the  law  declared  that  the  rateable 
value  of  unlisted  property  should  be  confiscated,  half  of  it  going  to  the 
inspectors,  half  to  the  colony.  This  method  was  soon  abandoned,  and  a 
fourfold  rate  of  taxation  imposed  on  omitted  property,  half  of  which 
valuation  went  to  the  assessors.  This  was  the  law  for  over  a  century, 
but  the  additions  made  were  so  inconsiderable  as  to  average  less  than 
$30,000  in  the  whole  state.  In  1821  this  valuation  was  made  threefold 
instead  of  fourfold,  the  assessors  getting  no  part  of  it ;  but  this  penalty 
proved  entirely  ineffectual,  and  was  abolished  in  1851.  In  1865  a  pen- 
alty of  ten  per  cent  for  not  returning  a  list  was  imposed,  and  in  1882  this 
was  made  progressive,  ten  per  cent  being  added  every  year;  but  in  1885 
the  progressive  feature  was  repealed. 

In  1890,  a  law  was  passed  for  a  special  purpose,  and  without  any  idea 
of  reforming  the  practice  of  taxing  personalty.  But  the  terms  of  the  law 
were  general,  and  authorized  any  person  to  report  to  the  State  Treas- 
urer any  bonds,  notes,  or  other  choses  in  action  in  his  possession,  and  to 
pay  a  tax  on  them  at  the  rate  of  one-fifth  of  one  per  cent  a  year  in  place 
of  other  taxes.  To  the  surprise  of  the  legislature,  many  millions  of  con- 
cealed securities  were  presently  disclosed,  the  owners  presumptively 
calculating  that  it  was  not  worth  while  to  commit  perjury  to  save  two 


THE  PROPORTIONATE  METHOD         105 

Another  conclusion,  of  much  practical  importance,  is 
to  be  derived  from  these  facts.  It  is  that  while  men  will, 
as  a  rule,  in  the  sworn  returns  which  they  make  to  the 
assessor,  declare  the  value  of  their  own  property  to  be  less 
than  it  is,  they  seldom  make  such  false  statements  con- 
cerning the  property  which  they  hold  in  trust  for  others. 
This  is  partly  because  they  have  not  the  same  induce- 
ment of  personal  gain;  for  they  have  little  direct  profit 
in  relieving  the  property  of  their  wards  from  taxation. 
But  it  is  chiefly  due  to  the  fact  that  trustees  are  compelled 
for  their  own  protection,  as  well  as  formally  required  by 
law,  to  keep  accurate  accounts  of  their  proceedings.  These 
accounts  are  not  only  subject  to  the  inspection  of  the  per- 
sons interested,  but  must  also,  in  many  cases,  be  recorded  in 
local  offices,  or  returned  to  state  departments.  As  private 
trustees  are  seldom  allowed  to  employ  the  funds  committed 
to  their  charge  in  active  business,  their  accounts  are  com- 
paratively simple,  and  state  the  value  of  the  funds  clearly, 
or  so  that  it  can  be  easily  ascertained.  For  most  trustees, 
therefore,  the  objections  to  making  false  returns  are  very 
serious,  and,  as  appears  from  the  records  in  Connecticut 
above  referred  to,  they  cause  executors  to  disclose  the  ex- 
istence of  much  concealed  property.  The  method  of  dis- 
closure is  thus  available  in  the  case  of  those  whose  prop- 
erty is  not  in  their  own  name,  chiefly  because  it  can  be 
supplemented  by  the  method  of  inspection. 


mills  of  interest.  The  value  of  securities  so  registered  has  ranged  from 
$20,000,000  to  $40,000,000  a  year.  In  1897  the  legislature,  reasoning 
that  twice  the  revenue  might  thus  be  obtained,  doubled  the  tax;  but, 
as  this  calculation  proved  incorrect,  it  is  probable  that  many  persons 
thought  it  better  to  conceal  their  property  than  to  pay  a  tax  of  two-fifths 
of  one  per  cent  upon  it.  A  similar  law  in  Maryland  has  had  equally  re- 
markable results  in  causing  concealed  property  to  be  added  to  the  lists. 


106  THE  METHODS  OF  TAXATION 

Attempts  have  been  made  in  some  states,  as  in  Massa- 
chusetts, to  enable  the  assessors  in  certain  taxing  districts 
to  obtain  the  information  available  to  assessors  elsewhere. 
Thus  when  a  taxpayer  removes  from  one  community  to 
another,  a  list  of  his  possessions  may  be  transmitted  to  his 
new  residence.  State  assessors  may  also  compare  the  re- 
ports of  the  local  assessors  and  other  records  for  the  pur- 
pose of  enforcing  correct  returns.  Lists  of  stockholders  in 
various  corporations  may  also  be  examined  by  state  as- 
sessors, so  that  the  owners  of  stock  may  be  reported  to 
local  assessors  for  taxation.  But  as  there  is  no  way  of 
inspecting  claims  and  rights  to  property  without  the  limits 
of  the  state,  these  attempts  cannot  bring  about  any  equality 
of  taxation.  Owners  of  claims  enforceable  within  the  state 
may  be  more  frequently  taxed,  but  this  would  tend  rather 
to  aggravate  than  to  remove  the  inequality.  The  induce- 
ment would  be  all  the  stronger  for  those  who  have  money 
to  lend,  to  lend  it  without  the  state,  and  borrowers  would 
find  it  all  the  more  difficult  to  obtain  accommodation  at 
home,  where  it  would  normally  be  provided.  It  may  some- 
times happen  that  nonresident  lenders  send  their  money 
into  a  state  to  be  loaned,  for  the  same  reason  that  resident 
lenders  send  their  money  out  of  it,  and  that  the  two  move- 
ments are  of  equal  volume.  In  such  event  the  loss  to  in- 
dividual borrowers  might  be  comparatively  trifling,  al- 
though the  aggregate  expense  of  this  circuitous  method  of 
extending  credit  would  be  considerable.  But  there  are 
differences  between  neighboring  states,  both  in  their  tax 
laws  and  in  the  ways  in  which  they  are  applied,  which 
renders  it  impossible  to  do  more  than  conjecture  as  to  the 
extent  of  such  movements.  It  admits  of  no  question,  how- 
ever, that  all  attempts  to  apply  the  general  tax  to  intangible 


THE  PROPORTIONATE  METHOD          107 

property  by  the  method  of  inspection  necessarily  result  in 
such  a  distribution  of  burdens  as  is  unequal  in  the  extreme. 

The  fact  that  much  intangible  property  escapes  the  ob- 
servation of  the  assessors  has  induced  the  legislators  in 
some  states  to  resort  to  the  odious  practice  of  employing 
spies  and  informers,  who  are  rewarded  from  the  taxes  on 
the  property  which  they  add  to  the  assessment  lists.  This 
practice  was  in  former  ages  generally  adopted  by  despotic 
rulers,  who  empowered  such  persons  as  contracted  to  col- 
lect the  revenues  to  use  whatever  methods  they  found  most 
efficacious.  These  persons  agreed  to  pay  specified  sums  to 
the  rulers,  and  compensated  themselves  with  the  additional 
amounts  which  they  extracted  from  the  subjects.  Under 
this  system  extortion  flourished,  and  the  distress  which  it 
caused  to  the  common  people  was  one  of  the  chief  causes 
of  the  French  Revolution.  We  read  that  Voltaire,  being 
in  a  company  where  it  was  proposed  that  every  one  should 
tell  the  most  horrible  story  of  human  oppression  that  he 
knew,  when  his  turn  came,  merely  said :  "  There  was  once 
a  farmer  general  of  the  revenue."  The  government  of  the 
United  States,  not  many  years  ago,  authorized  the  payment 
to  informers  of  a  moiety  of  the  customs  duties  recovered 
through  their  labors,  but  the  practice  was  attended  with 
such  scandalous  corruption  that  it  had  to  be  modified  to 
some  extent.  Spies  are  still  employed  by  that  government 
to  aid  in  the  collection  of  these  duties,  but  they  are  at- 
tached to  the  revenue  service,  and  are  partly,  at  least, 
compensated  with  regular  wages. 

It  might  seem  that  such  practices  had  been  sufficiently 
condemned  by  experience,  but  they  have  been  revived  in 
recent  years  by  several  of  our  legislatures.  It  has  long 
been  the  law,  in  the  State  of  Ohio,  that  taxpayers  should 


108  THE  METHODS  OF  TAXATION7 

make  out  lists  of  their  personal  property  and  verify  them 
by  oath,  their  assessments  being  increased  one  half  in  case 
of  their  failure  to  comply  with  the  statute.  The  assess- 
ments of  personal  property  under  this  statute  being  as  un- 
satisfactory as  the  experience  of  other  states  indicated  that 
they  would  be,  about  1880  the  practice  of  employing  in- 
formers began  to  be  authorized  by  the  legislature,  and  in 
1888  the  officers  of  every  county  were  empowered  to  con- 
tract with  such  persons,  their  compensation  not  to  exceed 
one  fifth,  or  in  some  cases  one  fourth,  of  the  sums  recov- 
ered through  their  activities.  The  county  auditor  was  also 
to  receive  a  commission  of  five  per  cent  on  these  collections. 
These  statutes  are  said  to  have  been  enacted  through  the 
influence  of  certain  persons  who  at  once  made  contracts 
with  the  authorities  in  many  counties,  and  proceeded  to 
organize  a  bureau  of  detectives  for  the  purpose  of  syste- 
matic investigation  within  and  without  the  state. 

The  results  of  this  enterprise,  while  no  doubt  highly 
satisfactory  to  the  "  tax  inquisitors,"  as  they  are  called, 
seem  not  to  have  been  especially  advantageous  to  the  state. 
The  assessed  valuation  of  personal  property  in  Ohio  was 
over  $535,000,000  in  1875.  In  1879  it  had  fallen  to  $443,- 
000,000,  and  in  1882  it  rose  again  to  $542,000,000.  In 
1888,  when  the  system  of  farming  the  taxes  was  author- 
ized, the  valuation  was  $532,000,000,  and  it  continued  to 
rise  until  1893,  when  it  was  $568,000,000,  falling  in  1897 
to  $511,000,000.  There  can  be  no  question,  however,  that 
personal  property  had  increased  during  this  period  at  a 
very  much  greater  rate  than  these  figures  indicate.  It  is 
not  certain  that  the  activity  of  the  inquisitors  did  not  cause 
as  much  property  to  be  removed  from  the  state  as  it  added 
to  the  lists,  but  it  is  certain  that  the  expense  of  collecting 


THE  PROPORTIONATE  METHOD          109 

the  taxes  increased  far  more  than  in  proportion  to  the  in- 
creased assessment.  It  might  be  expected  that  the  assess- 
ment of  intangible  property  would  show  a  marked  increase, 
such  property  being  least  apt  to  be  listed.  In  fact  such 
assessments  have  decreased.  The  assessed  value  of  credits 
fell  between  1888  and  1896  from  $111,900,000  to  $102,- 
800,000;  that  of  bonds  and  stocks  from  $7,400,000  to 
$7,300,000;  while  money  and  deposits  alone  showed  an 
increase,  the  figures  being  $33,800,000  in  1888,  and  $34,- 
700,000  in  1896.  In  Cincinnati,  where  the  inquisitorial 
system  was  first  adopted,  the  valuation  of  personal  prop- 
erty fell  between  1888  and  1897  from  $51,500,000  to 
$44,900,000.  In  Cleveland,  a  rapidly  growing  city,  this 
valuation  increased  materially,  but  at  a  less  rate  than  in 
the  years  preceding  the  employment  of  the  inquisitors. 

Moreover,  the  assessed  -value  of  bonds  and  stocks  more 
than  thirty  years  before  1898  had  been  over  $12,000,000. 
In  1851  the  value  of  money  and  credits  in  Hamilton 
County,  (Cincinnati),  was  about  $3,293,000;  in  1903  it 
was  $3,153,350.  In  1866  the  value  of  intangible  property 
in  this  county  was  about  $17,460,000;  in  1896  it  was 
$5,389,350.  During  that  period  the  amount  of  money 
fell  from  $6,778,883  to  $1,097,283,  the  population  mean- 
while having  more  than  doubled.  In  1903  the  deposits 
in  banks  and  trust  companies  appear  to  have  amounted  to 
about  $400,000,000,  of  which  about  $55,000,000  was  re- 
turned for  taxation.  Of  the  $70,000,000  on  deposit  in 
1896  with  the  banks  of  Cleveland,  $1,741,129  was  re- 
turned for  taxation.  The  claim  that  the  terror  of  the  law 
has  caused  many  persons  to  make  returns  that  they  would 
otherwise  have  omitted  seems  to  be  without  support. 
Whatever  gain  may  be  derived  from  this  source  is  probably 


110  THE  METHODS  OF  TAXATION 

much  more  than  offset  by  the  removal  from  the  state  of 
residents  owning  large  amounts  of  intangible  property; 
nor  may  we  disregard  the  possibility  that  immunity  may 
be  purchased  of  men  who  are  willing  to  exercise  the  office 
of  inquisitor;  although  in  ten  years  they  deducted,  from 
some  $1,600,000  which  they  collected  in  two  counties,  over 
$460,000  as  their  legal  compensation.  As  the  auditors 
of  these  counties  deducted  also  four  per  cent,  the  govern- 
ment received  about  $1,135,000  of  the  $1,600,000  exacted 
from  the  taxpayers. 

Neither  the  statute  of  1885,  nor  that  of  1888,  provides 
any  safeguard  against  corrupt  dealing  by  the  tax-gatherers ; 
indeed  the  statute  of  1885  did  not  limit  the  compensation 
of  the  inquisitors.  It  is  not  necessary  to  advertise  for 
bids,  nor  to  award  the  contract  to  the  lowest  bidder.  There 
is  no  limit  to  the  time  for  which  these  contracts  may  be 
made.  The  County  Auditor,  who  awards  them,  and  who 
sits  as  a  judge  to  hear  and  determine  the  issues,  is  di- 
rectly and  largely  interested  in  the  amount  that  he  finds 
due  from  the  taxpayer.  In  some  cases  the  amount  claimed 
has  been  $200,000  and  over;  and  if  the  claim  was  sus- 
tained the  auditor  would  receive  $8,000  or  $10,000,  and 
the  inquisitor  $50,000.  The  opportunities  for  collusion 
between  the  auditor,  the  inquisitor,  and  the  taxpayer  are 
.  very  great.  Many  suits  have  been  brought  for  large 
amounts,  and  quietly  settled  for  very  small  ones.  It  is 
asserted  that  large  sums  have  been  collected  from  tax- 
payers, no  part  of  which  has  reached  the  treasury.  While 
we  cannot  test  the  truth  of  these  assertions,  it  is  obvious 
that  there  is  nothing  in  the  law  to  prevent  such  practices, 
and  everything  to  encourage  them. 

It  is  safe  to  say  that  no  recognized  principles  of  justice 


THE  PROPORTIONATE  METHOD          111 

authorize  the  employment  by  government  of  spies  and  in- 
formers who  are  rewarded  out  of  the  taxes  which  they  aid 
in  collecting.  How  far  it  may  be  justifiable  to  offer  re- 
wards to  informers  who  secure  the  conviction  of  those 
guilty  of  felonies  it  is  not  necessary  here  to  inquire ;  but 
the  failure  to  pay  a  tax  is  not  commonly  regarded  as  an 
offense  of  such  turpitude  as  needs  to  be  repressed  by  the 
drastic  means  employed  against  murderers  and  highway- 
men. The  testimony  of  men  who  use  deceit  and  treachery 
in  procuring  evidence  is  always  open  to  suspicion,  and  is 
especially  so  when  it  is  for  the  pecuniary  interest  of  such 
men  to  have  their  testimony  received.  They  may  profess 
to  lie  for  a  good  end;  but  experience  has  justified  man- 
kind in  placing  little  credit  in  such  professions.  It  is  in- 
trinsically probable  that  men  who  do  not  scruple  to  prosti- 
tute their  honor  for  gain  will  not  be  very  particular  as  to 
the  quarter  from  which  the  gain  is  received,  and  this  pre- 
sumption has  been  abundantly  justified  by  experience. 
Informers  are  frequently  bribed  by  those  who  dread  their 
attacks,  even  when  such  attacks  would  fail  if  resisted; 
for  few  men  in  business  can  afford  to  have  their  integrity 
put  in  question  by  a  criminal  proceeding.  As  we  have  re- 
marked, such  shocking  scandals  arose  under  the  "  Moiety 
Act,"  which  was  passed  during  the  excitement  of  the  civil 
war,  as  compelled  congress  to  repeal  it;  and  the  modified 
system  which  now  prevails  is  severely  condemned  by  those 
familiar  with  its  operation,  because  of  the  corrupt  dealings 
which  it  encourages.  So  far  as  any  enlightened  public 
opinion  exists  on  the  subject,  it  seems,  in  civil  cases  at  least, 
to  disapprove  judgments  obtained  through  the  testimony 
of  witnesses  who  are  paid  if  their  evidence  secures  % 
verdict. 


112  THE  METHODS  OF  TAXATION 

It  may  excite  astonishment  that  methods  resulting  in 
such  extreme  inequality  should  ever  have  been  resorted 
to  by  legislatures,  and  it  is  certainly  remarkable  that  they 
continue  to  be  commonly  employed.  Yet  the  proposition 
that  all  forms  of  property  should  be  taxed  alike  is  a  plaus- 
ible one,  and  when  we  consider  that  most  of  our  lawmakers 
are  not  very  familiar  with  the  operation  of  economic  laws, 
or  perhaps  with  fiscal  science,  it  may  seem  less  surprising 
that  they  endeavor  to  apply  this  principle.  In  order  to 
apply  it,  as  we  have  seen,  it  is  indispensable  to  ascertain 
the  total  quantity  of  property  owned  by  every  individual, 
and  as  this  information  is  generally  in  the  possession  of 
the  individual  owner,  and  of  no  one  else,  the  most  obvious 
course  to  attain  it  is  to  put  the  question  to  the  owner  di- 
rectly. We  accordingly  find  that  this  course  has  been  fol- 
lowed from  the  earliest  times  and  in  every  part  of  the  earth. 
From  the  point  of  view  of  the  ruler,  no  citizen  ought  to 
refuse  to  furnish  such  information,  and  attempts  to  evade 
this  duty  are  properly  treated  as  crimes.  In  many  coun- 
tries, and  even  under  the  Roman  Empire,  torture  has  been 
used  to  compel  the  delinquent  taxpayers  to  disclose  their 
hidden  property.  King  John  of  England,  if  we  may  be- 
lieve Roger  de  Wendover,  induced  Jews  to  reveal  the 
amount  of  their  wealth  by  pulling  out  their  teeth,  and 
perhaps  in  some  Oriental  countries  the  bastinado  is  still 
used  for  similar  purposes.  Where  such  views  concerning 
the  administration  of  justice  prevail,  the  fact  that  a  law 
is  commonly  violated  is  not  an  argument  for  its  repeal. 
Such  violation  constitutes  an  argument  for  increasing  the 
severity  of  punishment,  not  for  yielding  to  law  breakers. 
It  is  true  that  the  burdens  of  those  who  comply  with  the 
law  are  increased  by  the  failure  of  others  to  disclose  their 


THE  PROPORTIONATE  METHOD          113 

wealth;    but  this  result  is  regarded  as  a  consequence  not 
of  the  law  but  of  the  perversity  of  those  who  disobey  it.1 

This  theory  of  jurisprudence  has  been  largely  discred- 
ited by  experience.  It  evidently  disregards  all  distinctions 
between  laws.  We  commonly  speak  of  good  laws  and  bad 
laws,  and  when  a  law  is  believed  to  work  injustice  it  is 
difficult  to  persuade  men  that  it  ought  to  be  enforced.  It 
may  sometimes  be  advantageously  enforced  for  the  very 
purpose  of  creating  so  much  indignation  as  will  cause  its 
repeal ;  but  when  its  repeal  is  not  proposed  by  the  govern- 
ment, or  is  positively  resisted,  the  subjects  may  regard  it  as 
their  duty  to  disobey.  ~No  truth  is  better  established  by 
experience  than  that  most  men,  when  in  position  to  exer- 
cise control  over  others,  are  irresistibly  tempted  to  use 
their  power  arbitrarily.  The  progress  of  civilization  is 
due  in  great  measure  to  the  refusal  of  subjects  to  obey  the 
unreasonable  commands  of  their  rulers.  It  is  the  especial 
pride  of  the  English-speaking  peoples  that  the  sturdy  spirit 
of  their  progenitors  established  the  rights  of  subjects  on  a 
permanent  basis,  and  made  clear  certain  principles  of  jus- 
tice which  no  statutes  were  to  contravene.  The  mere  fact 
that  a  ruler  commands  is  not,  to  an  Englishman,  a  suffi- 
cient reason  why  he  should  obey.  The  command  must  seem 
to  him  to  accord  with  constitutional  principles  of  justice, 
or  he  may  decline  to  comply  with  it.  No  sacrifice  may 
seem  to  him  too  great  if  made  in  defense  of  the  funda- 

1  At  a  time  when  distilled  spirits  were  selling  in  open  market  for  less 
than  the  amount  for  which  they  were  taxable,  and  the  returns  from  this 
excise  had  very  greatly  fallen,  the  Commissioner  of  Internal  Revenue, 
the  late  David  A.  Wells,  proposed  a  tax  low  enough  to  insure  the  collec- 
tion of  an  abundant  return.  But  a  representative  of  New  York,  Roscoe 
Conkling,  declared  that  he  was  not  ready  to  admit  that  the  nation  which 
had  put  down  a  great  rebellion  at  a  cost  of  so  much  blood  and  treasure, 
could  not  collect  a  tax  of  two  dollars  a  gallon  on  whiskey. 

8 


114  THE  METHODS  OF  TAXATION 

mental  liberties  of  his  people.  If  he  is  commanded  to 
abjure  his  religion,  he  may  choose  rather  to  go  into  exile 
or  to  be  burned  at  the  stake.  If  he  is  ordered  to  persecute 
others,  he  may  prefer  to  go  to  prison.  If  ship-money  is 
levied  unjustly,  he  may,  like  John  Hampden,  refuse  to  pay, 
at  the  risk  of  forfeiting  his  estate  and  losing  his  head.  If 
a  law  directs  him  to  return  a  fugitive  slave  to  his  master, 
he  may  decide  to  aid  the  fugitive  to  escape  and  defy  his 
rulers  to  prevent  him.  Laws  are  not  obeyed  because  they 
are  ordained  by  rulers,  but  because  they  are  thought  just 
by  subjects.  The  law  cannot  make  that  a  crime  in  common 
estimation  which  nature,  as  Adam  Smith  says,  never  meant 
to  be  such;  it  cannot  effectively  punish  conduct  which  is 
not  condemned  by  the  moral  sense  of  the  community.  Our 
government  is  supposed  to  represent  its  citizens;  its  laws 
are  supposed  to  express  the  will  of  the  whole  people.  If 
they  conflict  with  established  principles  of  justice,  they 
should  not  be  enforced,  but  repealed.  The  true  sanction 
is  not  the  legislative  fiat,  but  public  opinion. 

Probably  most  men  do  not  refuse  to  disclose  the  extent 
of  their  ownership  of  invisible  property  from  any  deep- 
seated  conviction  that  resistance  to  laws  subversive  of 
morality  is  a  righteous  obligation.  They  may  regard  the 
enforcement  of  such  laws  as  of  the  nature  of  persecution; 
but  persecution,  as  Leslie  Stephen  observes,  has  an  ambigu- 
ous influence.  "  If  it  sometimes  generates  in  its  victims 
a  heroic  hatred  of  oppression,  it  sometimes  predisposes 
them  to  the  use  of  the  weapons  of  intrigue  and  falsehood, 
by  which  the  weak  evade  the  tyranny  of  the  strong."  No 
doubt  this  result  commonly  follows;  we  cannot  be  blind 
to  the  fact  that  great  numbers  of  men,  otherwise  law- 
abiding,  and  in  other  affairs  of  unimpeachable  integrity, 


THE  PROPORTIONATE  METHOD          115 

notoriously  evade  the  law  by  concealment,  deceit,  and  even 
false  swearing.  While  parsimony  and  meanness  may  ex- 
plain this  in  part,  we  know  that  many  of  those  persons  are 
liberal  in  their  voluntary  contributions  to  public  ends. 
Inquiry  among  them  shows  that  they  rebel  at  what  they 
regard  as  the  outrageous  inequality  of  the  burdens  imposed 
by  the  law.  They  are  thoroughly  convinced  that  to  tax  a 
debt,  when  the  property  on  which  the  debt  is  a  lien  is  also 
taxed,  is  "  double  taxation."  The  debt  would  have  no 
value  if  the  debtor  had  no  property ;  and  if  the  debtor  has 
property,  his  ownership  is  really  limited  by  the  rights  of 
his  creditors.  This  conviction  is  certainly  well  founded; 
and,  whether  well  founded  or  not,  it  evidently  is  sincere 
and  ineradicable.  Nor  is  this  all.  The  conviction  is 
equally  strong  that  a  very  large  proportion  of  those  tax- 
able under  such  laws  do,  %as  a  matter  of  fact,  evade  them, 
and,  in  spite  of  the  most  severe  penalties,  will  continue 
to  evade  them.  Whoever  pays,  therefore,  pays  not  only  his 
own  share  but  that  of  the  delinquents.  Obedience  to  the 
law  is  punished,  and  disobedience  rewarded.  As  a  very 
competent  expert  in  taxation,  Sir  A.  West,  puts  it,  one 
man's  exemption  is  another  man's  taxation;  and  when  the 
grievance  of  double  taxation  is  added,  it  seems  impossible 
to  deny  that  the  indignation  expressed  at  so  great  injustice 
is  righteous,  even  if  the  method  of  resisting  the  injustice 
is  not. 

The  resort  to  the  method  of  disclosure,  or  confession, 
implies  that  the  assessor  is  unable  otherwise  to  ascertain 
the  amount  of  the  wealth  of  the  subject.  It  implies,  there- 
fore, that  the  subject  is  to  act  as  judge  in  his  own  cause, 
and  to  assess  himself.  It  implies  that  if  the  subject  does 
not  choose  to  communicate  his  knowledge  to  the  assessor, 


116  THE  METHODS  OF  TAXATION 

the  latter  will  remain  in  ignorance.  If  the  subject  can  con- 
ceal his  possessions,  they  are  not  likely  to  be  discovered; 
if  they  were  discoverable,  the  assessor  needed  not  to  call  on 
the  owner.  The  latter  knows  that  concealment  is  commonly 
practiced,  and  that  if  he  does  not  practice  it  he  will  pay  the 
taxes  of  those  who  do.  The  requirement  of  the  law  appears 
to  most  taxpayers  as  so  palpably  unjust  as  to  amount  to 
legalizing  robbery;  and  many  of  them  no  more  hesitate 
to  deceive  the  assessor  than  they  would  hesitate  to  deceive 
a  highwayman. 

It  has  been  the  practice  in  the  city  of  New  York  to  take 
the  names  of  a  large  number  of  persons  at  random,  and 
assess  them  arbitrarily.  Nearly  half  of  these  assessments 
are  erroneous,  and  are  eventually  cancelled,  the  persons 
assessed  appearing  before  the  tax-commissioners,  and 
"  swearing  off  "  their  taxes.  The  loss  of  time  thus  caused 
is  in  the  aggregate  enormous,  and  the  vexation  and  annoy- 
ance caused  by  demands  for  money  which  is  not  due  are 
themselves  an  onerous  tax.  Many  men  cannot  afford  to 
wait  for  hours  in  a  cue,  in  order  to  prove  that  an  unjust 
demand  has  been  made  upon  them ;  it  is  cheaper  for  them 
to  submit  to  be  robbed  when  the  amount  involved  is  not 
large.  Many  persons  do  not  understand  how  to  proceed 
in  order  to  have  their  assessments  corrected;  many  are 
ignorant  of  the  details  of  the  laws,  and  suppose  themselves 
to  be  taxable  for  property  which  is  exempt.  The  govern- 
ment of  the  City  of  New  York  in  this  manner  succeeds  in 
obtaining  a  considerable  sum  in  taxes  to  which  it  has  no 
right  whatever.  It  occupies  the  position  of  a  petty  pil- 
ferer, who  knows  that  those  whom  he  plunders  will  con- 
sider that  it  is  cheaper  to  submit  to  small  depredations  than 
to  invoke  the  law  to  prevent  them.  Nevertheless,  the  ex- 


THE  PROPORTIONATE  METHOD          117 

actions  of  the  government  of  New  York  under  the  general 
property  tax  are  less  severe  and  less  unjust  than  those  of 
nearly  all  the  states  of  the  union.1 

When  laws  professing  to  tax  all  property  equally  result 
in  such  extreme  inequality,  they  would  seem  to  be  suffi- 
ciently condemned.  In  fact,  the  method  of  disclosure  is 
repugnant  not  only  to  public  opinion  but  also  to  the  spirit 
of  our  jurisprudence.  Its  principle,  especially  when  it 
requires  taxpayers  to  make  returns  of  their  property  under 
oath,  conflicts  with  a  fundamental  rule  of  evidence.  This 
rule,  proved  necessary  by  very  long  and  painful  experi- 
ence, is  expressed  in  the  maxim,  Nemo  tenetur  seipsum 
prodere,  which  is  embodied  in  the  fifth  amendment  to  the 
Constitution  of  the  United  States.  In  primitive  times, 
when  a  person  accused  or  suspected  of  any  offense  was 
brought  before  a  court,  he  might  be  compelled  to  testify. 
The  early  jurists  apparently  reasoned  that  the  accused 
person  must  know  whether  he  was  guilty  or  not  better 
than  any  one  else,  and  it  is  certainly  natural  to  make  the 
inquiry.  Whoever  fails  to  comply  with  a  demand  ap- 
parently so  reasonable,  inevitably  creates  a  certain  pre- 
sumption of  his  guilt.  Such  refusal  naturally  arouses  in- 
dignation, and  disposes  men  to  employ  strong  measures. 
The  most  expeditious  mode  of  getting  at  the  truth  in  such 
cases  seems  to  be  to  extort  confession.  Hence  various 
forms  of  torture  have  been  used,  not  only  to  overcome  the 
reluctance  of  accused  persons  to  testify,  but  even  to  induce 
witnesses  to  speak  the  truth.  Practices  of  this  kind  still 
prevail  among  savages,  and  they  have  not  quite  disap- 

1  The  evidence  on  this  subject  is  so  voluminous  that  it  is  impossible 
in  a  work  of  this  character  even  to  summarize  it.  Many  particulars, 
however,  will  be  found  in  Appendix  A. 


118  THE  METHODS  OF  TAXATION 

peared  from  the  jurisprudence  of  the  most  enlightened 
nations.  The  celebrated  Dreyfus  case  called  the  attention 
of  the  world  to  the  powers  of  French  judges  in  extracting 
admissions  from  the  accused;  and  the  inferior  officers  of 
justice  in  English-speaking  communities  frequently  yield 
to  the  temptation  to  employ  measures  which,  although 
illegal,  may  frighten  the  guilty  into  confession.  Such 
practices  are  constantly  resorted  to  in  that  crude  form  of 
administering  justice  which  we  know  as  Lynch  law,  and 
it  has  been  found  necessary  to  prohibit  legislatures  from 
applying  their  principle  by  constitutional  restraints. 

The  irrationality  of  such  methods  in  criminal  procedure 
has  often  been  exposed.  According  to  Blackstone,  the 
Civil  Law  assigned  as  a  reason  for  using  the  rack  to  ex- 
tort confession  from  persons  accused  of  crime,  that  "  the 
law  cannot  endure  that  any  man  should  die  upon  the  evi- 
dence of  a  false,  or  even  of  a  single  witness,  and  therefore 
contrived  this  method  that  innocence  should  manifest  itself 
by  a  stout  denial,  or  guilt  by  a  plain  confession.77  The 
theory  of  the  procedure  is  more  effectively  laid  bare  by 
Beccaria,  who  offers  the  problem :  "  The  force  of  the 
muscles  and  the  sensibility  of  the  nerves  of  an  innocent 
person  being  given,  it  is  required  to  find  the  amount  of 
pain  necessary  to  make  him  confess  himself  guilty  of  a 
given  crime."  Most  enlightened  jurists  have  concurred 
in  the  view  that  truth  is  not  likely  to  be  attained  by  com- 
pelling witnesses  to  testify  through  torture,  and  Cicero's 
condemnation  of  the  practice  is  as  emphatic  and  complete 
as  that  of  any  modern  writer.1  But  while  the  correctness 

1  Tamen  ilia  tormenta  gubernat  dolor,  moderatur  natura  cuj  usque 
turn  animi  turn  corporis,  regit  quaesitor,  flectat  libido,  corrumpit  spes, 
infirmat  metus,  ut  in  tot  rerum  angustiis  nihil  veritati  loci  relinquatur. 
CICERO,  Pro.  Sulla,  28. 


THE  PROPORTIONATE  METHOD          119 

of  this  view  is  admitted  in  the  case  of  persons  charged 
with  crime,  this  is  not  true,  at  least  to  the  same  extent, 
in  other  judicial  proceedings.  No  objection,  perhaps,  exists 
to  compelling  disinterested  witnesses  to  testify,  but  when 
they  are  interested  pecuniarily  in  the  result,  the  problem 
becomes  far  from  simple.  On  the  one  hand,  justice  can- 
not well  be  administered  if  those  who  have  information 
concerning  a  matter  in  dispute  refuse  to  communicate 
their  knowledge.  On  the  other  hand,  if  all  persons  be- 
lieved to  have  such  information  are  threatened  with  punish- 
ment if  they  refuse  to  testify,  there  is  danger  that  the 
motives  which  lead  them  to  refuse,  will,  if  overpowered 
by  the  dread  of  punishment,  lead  them  to  testify  falsely. 

The  practice  of  administering  oaths  in  judicial  pro- 
ceedings seems  to  have  been  devised  to  overcome  this  dif- 
ficulty. This  practice  has  existed  from  the  earliest  times, 
and  was  intended  to  supplement  the  terrors  of  human 
punishment  with  the  dread  of  the  vengeance  of  the  gods. 
It  is  probable  that  in  a  primitive  age  the  fear  of  such 
vengeance  may  have  frequently  operated  to  deter  men 
from  false  swearing,  although  historians  have  preserved 
for  us  many  picturesque  details  of  the  perennial  elasticity 
of  the  human  conscience.  But  the  maxims  of  the  Civil 
Law  prove  that  present  advantage  was  sometimes  found 
to  be  a  more  powerful  motive  than  fear  of  retribution  in 
a  future  life.  Nullus  idoneus  testis  in  re  sua  intelligitur 
is  the  statement  in  the  Digest,  and  the  same  rule  is  laid 
down  in  the  Code.  It  is  within  the  memory  of  living 
men  when  the  principle  of  our  Common  Law,  forbidding 
parties  to  the  record  in  a  civil  action  to  testify,  was  abro- 
gated ;  not  so  much,  perhaps,  because  the  theory  that  par- 
ties would  testify  falsely  in  their  own  behalf  was  thought 


120  THE  METHODS  OF  TAXATION 

to  be  erroneous,  as  because  it  seemed  on  the  whole  easier 
to  get  at  the  truth  after  hearing  the  parties  give  their 
respective  versions  of  the  facts.  Certainly,  in  the  opinion 
of  the  older  judges  and  writers  on  the  law,  witnesses  whose 
interests  were  affected  were  not  generally  restrained  from 
falsehood  by  their  oaths.  It  has  been  laid  down  that  will- 
ingness to  testify  in  such  a  case  is  of  itself  a  ground  for 
distrusting  a  witness,  and  that  "  it  can  be  no  injury  to 
truth  to  remove  those  from  the  jury  whose  testimony  may 
hurt  themselves,  and  can  never  induce  any  rational  be- 
lief." "  It  is  not  to  be  presumed,"  said  Chief  Justice 
Tindal,  "  that  a  man  who  complains  without  cause,  or 
defends  without  justice,  should  have  honesty  enough  to  con- 
fess it."  Interested  witnesses,  therefore,  "  the  law  removes 
from  testimony,  to  prevent  their  sliding  into  perjury." 

A  distinction  obviously  exists,  however,  between  the  rule 
which  disqualifies  a  man  from  being  a  judge  in  his  own 
cause,  and  that  which  forbids  him  to  be  a  witness  therein. 
The  latter  rule  was  modified  because  of  the  extreme  in- 
convenience which  it  was  found  to  occasion,  and  not  from 
any  conviction  on  the  part  of  judges  that  the  veracity  of 
mankind  had  been  underestimated.  The  ability  of  jury- 
men to  weigh  testimony  has  undoubtedly  increased,  and 
it  seems  on  the  whole  advantageous  to  allow  litigants  to 
give  their  respective  versions  of  the  matter  in  dispute,  and 
to  let  the  jury  accept  the  account  which  appears  the  more 
probable.  The  fact  that  the  parties  make  oath  to  the 
truth  of  their  statements  has  nowadays,  in  many  jurisdic- 
tions, no  great  weight  with  the  court.  The  employment 
of  compurgators  in  the  wager  of  law,  where  each  party 
brought  his  friends  into  court  to  swear  that  he  was  telling 
the  truth,  may  be  referred  to  as  proving  the  importance 


THE  PROPORTIONATE  METHOD          121 

of  the  oath,  in  securing  veracity.  But  however  this  may 
have  been  in  a  superstitious  age,  it  will  not  be  contended 
now  by  those  familiar  with  litigation,  that  either  parties 
or  witnesses  are  kept  from  falsehood  by  fear  of  punish- 
ment in  a  future  life.  Very  many  persons  will  not  bear 
false  witness ;  but  it  is  not  because  they  apprehend  eternal 
damnation,  or,  in  many  cases,  because  they  stand  in  awe 
of  the  penalty  for  perjury.  On  the  other  hand,  it  is  un- 
questionably true  that  many  persons  will  testify  falsely 
when  they  are  satisfied  that  they  cannot  be,  or  will  not 
be,  convicted  of  perjury;  and  they  will  often  do  this  to 
obtain  a  comparatively  insignificant  advantage. 

The  wisdom  of  compelling  parties  to  testify  under  oath 
is  more  doubtful  than  that  of  permitting  them  to  do  so. 
This  practice  came  into  vogue  under  the  Civil  Law,  but 
the  Common  Law  did  not  usually,  as  Blackstone  says, 
reduce  the  defendant,  if  in  the  wrong,  to  the  dilemma  of 
either  confession  or  perjury.1  On  some  accounts  it  is 
unfortunate  that  the  practice  in  Chancery,  derived  from 
the  Civil  Law,  has  now  become  general  in  our  courts, 
parties  being  compelled  to  verify  their  pleadings  under 
oath.  As  there  would  ordinarily  be  no  occasion  for  plead- 
ings unless  the  parties  contradicted  each  other,  one  of 
them  must  be  guilty  of  swearing  to  what  is  untrue.  Noth- 
ing is  so  rare,  however,  as  for  a  person  to  be  prosecuted 
for  perjury  of  this  kind,  or  indeed  of  any  kind.  It  is 
difficult  to  believe  that  pleadings  would  be  less  veracious 


1  It  is  true,  however,  that  the  sentence  of  peine  forte  ei  dure  was  in- 
flicted on  those  who  refused  to  plead  to  certain  charges,  as  we  know  from 
the  fate  of  some  heroic  men  who  suffered  this  horrible  punishment  in 
order  to  save  their  estates  for  their  children;  their  course  preventing 
the  jury  from  finding  a  verdict,  whieh  was,  in  some  cases,  a  necessary 
condition  of  forfeiture. 


122  THE  METHODS  OF  TAXATION 

if  unverified,  and  the  practice  of  requiring  oaths  in  all 
manner  of  proceedings,  and  on  most  trivial  occasions,  has 
become  an  almost  meaningless  formality.  Many  of  the 
statutory  requirements,  indeed,  cannot  be  complied  with 
strictly,  and  their  existence  tends,  by  promoting  contempt 
for  judicial  oaths,  to  impair  the  regard  for  veracity  in 
other  transactions.  Beyond  question,  men  do  not,  in  many 
cases,  regard  that  as  seriously  wrong  which  the  law  re- 
gards invariably  as  a  felony.  To  bear  false  witness  against 
a  neighbor  is  universally  odious,  and  is  perhaps  not  a 
very  common  offense.  To  testify  falsely  in  behalf  of  a 
friend  is  less  severely  condemned,  and  is  of  comparatively 
frequent  occurrence.  To  swear  to  what  is  untrue  in  dis- 
putes concerning  property  is  evidently  regarded  as  a  venial 
sin,  and  one  to  which  men  are  so  prone  that  in  some  cases 
the  law  refuses  to  listen  to  witnesses.  Thus  no  one  is 
allowed  to  establish  a  claim  against  the  estate  of  a  dead 
man  by  swearing  to  communications  '  had  with  the  de- 
cedent, and  the  Statute  of  Frauds  and  Perjuries  excludes 
oral  testimony  concerning  a  large  class  of  transactions; 
although  doubt  has  been  felt  whether  the  statute  does  not 
cause  more  perjury  than  it  prevents. 

Thus,  in  spite  of  the  modifications  which  the  Common 
Law  has  undergone,  it  is  still  reluctant  to  admit  the  tes- 
timony of  interested  witnesses,  and  to  compel  that  of 
witnesses  who  are  liable  to  suffer  for  testifying.  One  may 
call  his  adversary  as  a  witness;  but,  if  he  does,  he  may 
not  contradict  him,  and  the  privilege  is  thus  not  likely 
to  be  abused.  And  while  witnesses,  and  even  parties,  are 
required  to  give  evidence  in  civil  actions,  although  they 
may  thereby  prejudice  their  pecuniary  interests,  the  law 
has  everywhere  adopted  the  rule  in  Equity  that  no  one 


THE  PROPORTIONATE  METHOD          123 

shall  be  compelled  to  make  a  disclosure  which  may  expose 
him  to  a  penalty,  or  anything  in  the  nature  of  a  forfeiture. 
This  rule  has  been  so  often  approved  by  the  courts  as  to 
make  it  impracticable  even  to  enumerate  authorities.  It 
will  be  sufficient  to  refer  to  one  case,  decided  in  the 
Supreme  Court  of  the  United  States,  where  the  justice 
of  requiring  a  person  to  furnish  evidence  against  himself 
was  directly  at  issue.1  The  case  arose  under  a  statute 
requiring  a  person,  charged  with  failing  to  pay  certain 
taxes,  to  produce  such  of  his  books  and  papers  as  were 
demanded  by  the  government,  or  else  to  have  the  charges 
of  the  prosecution  taken  as  confessed.  It  was  contended, 
in  the  defendant's  behalf,  that  this  was  not  only  tantamount 
to  compelling  him  to  testify  against  himself,  but  was  also 
equivalent  to  a  search  and  seizure,  because  it  would  effect 
the  sole  object  and  purpose  of  search  and  seizure;  and 
that  it  would  be  an  unreasonable  search  and  seizure,  within 
the  meaning  of  the  Fourth  Amendment  of  the  Constitution. 
There  is  no  English  precedent  for  such  a  law,  for  even 
the  act  under  which  the  obnoxious  writs  of  assistance  were 
issued,  in  the  reign  of  Charles  II,  only  authorized  the 
search  for  and  seizure  of  goods  on  which  the  government 
had  a  lien  for  taxes.  The  practice  of  issuing  these  writs 
of  assistance  to  revenue  officers  was  pronounced  by  James 
Otis,  in  1761,  to  be  "  the  worst  instrument  of  arbitrary 
power,  the  most  destructive  of  English  liberty,  and  the 
fundamental  principles  of  law,  that  ever  was  found  in  an 
English  law-book."  In  Lord  Camden's  celebrated  dis- 
cussion of  the  right  of  search,  he  stated  principles  which 
have  ever  since  been  recognized  in  England,  and  which 
were  built  into  the  foundations  of  American  Government. 

1  Boyd  vs.  United  States,  116  U.  S.  Rep.  621. 


124  THE  METHODS  OF  TAXATION 

He  declared  that  there  was  no  law  justifying  an  entry  on 
private  property  for  the  purpose  of  inspecting  or  seizing 
the  owner's  papers.  He  pointed  out  the  difference  be- 
tween such  a  trespass  and  the  search  for  stolen  goods  — 
where  the  owner  of  the  goods  is  allowed,  on  his  oath  of  a 
theft  and  that  his  goods  are  at  a  certain  place,  to  have 
a  search  warrant  for  that  place,  on  condition  that  he  be 
present  at  the  execution  of  the  warrant  in  order  to  iden- 
tify his  property.  As  to  the  "  argument  of  utility,"  that 
such  a  search  is  a  means  of  detecting  offenders  by  dis- 
covering evidence,  Lord  Camden  observed,  "  It  is  very 
certain  that  the  law  obligeth  no  man  to  accuse  himself; 
because  the  necessary  means  of  compelling  self-accusation, 
falling  upon  the  innocent  as  well  as  the  guilty,  would 
be  both  cruel  and  unjust;  and  it  would  seem  that  search 
for  evidence  is  disallowed  upon  the  same  principle." 

The  principles  of  this  judgment, ,  Justice  Bradley,  pro- 
nouncing the  opinion  of  the  Supreme  Court  of  the  United 
States,  declared  to  be  of  the  essence  of  constitutional  lib- 
erty and  security;  and  he  observed  that  the  men  who 
framed  and  adopted  the  Fourth  and  Fifth  Amendments 
relied  on  the  language  of  Lord  Camden  as  expressing  the 
true  nature  of  the  rights  of  freemen.  By  the  judiciary 
act  of  1789,  the  production  of  papers  by  parties  to  an 
action  at  law  was  authorized  only  in  cases  where  it  might 
have  been  required  by  the  rules  of  Chancery.  But 
Chancery  never  required  a  party  to  make  any  disclosure 
under  oath,  or  to  produce  any  paper,  if  the  effect  would 
be,  or  even  might  be,  to  tend  to  prove  him  guilty  of  a 
crime,  or  to  subject  him  to  anything  of  the  nature  of  a 
forfeiture  of  his  property.  The  revenue  act  of  1874,  under 
which  the  prosecution  took  place,  while  it  expressly  ex- 


THE  PROPORTIONATE  METHOD          125 

eluded  criminal  proceedings  from  its  operation,  embraced 
civil  suits  for  penalties  and  forfeitures.  It  was  not  within 
the  literal  terms  of  either  the  Fourth  or  the  Fifth  Amend- 
ment, but  the  Supreme  Court  held  that  it  violated  the  spirit 
of  both  of  them.  The  fact  that  the  result  of  the  proceed- 
ing might  be  to  subject  the  defendant  to  fine  or  imprison- 
ment or  forfeiture  of  goods,  made  the  proceeding  criminal 
in  its  nature,  although  it  was  civil  in  form.  The  compul- 
sory production  of  papers  was  held  to  be  an  unreasonable 
search  and  seizure,  within  the  meaning  of  the  Fourth 
Amendment,  and  it  was  also  held  equivalent  to  compelling 
the  defendant  to  be  a  witness  against  himself,  within  the 
meaning  of  the  Fifth  Amendment.  The  opinion  in  this 
case  showed  also  that  the  purpose  of  these  amendments 
could  not  be  evaded  by  making  the  proceeding  for  for- 
feiture in  rem  instead  of  in  personam.  Goods  cannot  be 
forfeited  without  some  breach  of  the  law  by  their  owner. 
As  was  said  by  Chief  Justice  Vaughn :  "  Goods,  as  goods, 
cannot  offend,  forfeit,  unlade,  pay  duties,  or  the  like,  but 
men  whose  goods  they  are."  For  the  same  reason,  the 
suggestion  that  the  owner  might  be  cited  as  a  witness  in 
a  proceeding  to  condemn  his  property  was  rejected. 

Although  statutes  commanding  the  owners  of  property 
to  disclose  all  that  they  own  to  the  assessors  may  not  be 
held  unconstitutional,  those  which  provide  forfeitures  or 
penalties  when  property  taxable,  but  previously  untaxed, 
is  thus  discovered,  seem  to  be  clearly  so.  Even  in  the 
former  case  there  is  practically  a  forfeiture,  owing  to 
the  fact  that  the  burden  of  those  who  comply  with  the 
statute  is  increased  by  the  delinquency  of  those  who  do 
not,  to  say  nothing  of  double  taxation.  Moreover  the 
considerations  which  have  led  to  the  incorporation  of  the 


126  THE  METHODS  OF  TAXATION 

rule  in  our  fundamental  law  are  peculiarly  forcible  when 
taxation  is  involved.  In  a  dispute  concerning  property, 
the  issue  is  commonly  between  two  individual  claimants. 
Where  it  is  a  question  of  taxation,  the  interest  of  an 
individual  is  opposed  to  that  of  all  the  members  of  the 
community,  represented  by  the  tax-gatherer.  A  false 
statement  in  the  former  case  may  cause  direct  and  disas- 
trous loss  and  suffering  to  a  fellow  creature ;  in  the  latter 
case  it  may  be  impossible  to  prove  that  a  false  statement 
will  perceptibly  lessen  the  comfort  or  happiness  of  any 
human  being.  It  is  obvious  that  the  degree  of  moral 
turpitude  is  much  greater  in  the  former  case  than  in  the 
latter.  A  man  who  is  tempted  to  testify  falsely  may  be 
deterred  by  the  reflection  that  he  will  rob  another  of  what 
justly  belongs  to  him;  but  when  the  loss  is  distributed 
in  infinitesimal  portions  among  thousands  or  millions, 
this  consideration  has  little  weight.  It  is  only  necessary, 
in  proof  of  the  existence  of  this  distinction  in  the  ordi- 
nary morality,  to  refer  to  the  attitude  of  travellers  when 
subjected  to  the  inquisition  of  the  custom  house.  The 
number  of  those  who  conscientiously  endeavor  to  pay  in 
full  the  taxes  prescribed  by  law  is  notoriously  small,  and 
the  traveller  who  professes  any  such  intention  is  apt  to 
be  looked  upon  as  a  hypocrite.  The  same  insensibility 
prevails  in  the  relations  of  the  public  to  property  invested 
in  corporations.  To  obtain  transportation  on  a  railroad 
without  paying  for  it  is  obviously  a  wrong  to  the  stock- 
holders; but  as  they  are  unconscious  of  the  wrong,  any, 
one  who  declines  to  "  ride  on  a  pass  "  on  moral  grounds 
is  thought  quixotic,  and  many  persons  do  not  hesitate  to 
evade  paying  their  fares  if  they  find  that  they  can  do 
so  without  detection. 


THE  PROPORTIONATE  METHOD          127 

The  attitude  of  our  government,  in  compelling  travellers 
entering  the  country  to  make  oath  to  the  quantity  and 
value  of  all  their  belongings,  has  been  peculiarly  unreason- 
able. If  it  complied  with  the  ordinary  rules  of  evidence, 
it  would  be  bound  by  the  testimony  of  the  witness  that  it 
called,  and  would  be  obliged  to  accept  the  valuation  that 
he  put  on  his  property.  Such  a  course,  however,  would 
undoubtedly  illustrate  the  wisdom  of  allowing  no  one 
to  be  a  judge  in  his  own  cause.  Few  persons  who  have 
landed  at  the  port  of  New  York  will  maintain  that  their 
fellow  passengers  would  generally  declare  to  the  customs 
officer  the  nature  and  value  of  their  goods,  if  they  were 
assured  that  no  inspection  was  to  take  place;  the  revenue 
derived  by  the  government  from  this  source,  always  in- 
significant, would  perhaps  disappear  altogether.  Instead 
of  observing  this  rule  of  evidence,  therefore,  the  govern- 
ment has  exercised  the  prerogative  of  calling  witnesses 
whose  testimony  it  will  accept  as  conclusive  when  in  its 
favor,  and  will  repudiate  when  not;  a  procedure  not 
much  more  reasonable  than  that  formerly  employed  in 
trials  for  witchcraft.1  If  the  witness  confesses,  his  tes- 
timony is  conclusive  against  himself;  if  he  denies,  his 
testimony  is  rejected,  and  other  evidence  is  sought  to 
convict  him.  If  this  evidence  is  sufficient  to  prove  the 
case  of  the  government,  it  does  not  need  to  compel  the 
witness  to  testify.  If  it  is  insufficient,  the  witness  is  in 
position  to  decide  the  case  in  his  own  favor,  and  the  pre- 
sumption is  thoroughly  established  by  experience  that  he 
will  generally  so  decide. 

A  remarkable  illustration  of  the  light  esteem  in  which 

1  In  1907  the  government  ceased  to  compel  travellers  from  abroad 
to  make  oath  to  the  truth  of  their  declarations. 


128  THE  METHODS  OF  TAXATION 

oaths  have  come  to  be  held  in  these  proceedings  is  afforded 
by  the  conduct  of  many  of  the  assessors  of  taxes.  They 
are  sworn  to  assess  all  property  at  its  fair  value,  but  in 
some  states  few  of  them  pretend  even  to  attempt  to  do 
so.  Their  disregard  of  the  law  is  justified,  in  their  opinion 
and  in  that  of  their  several  districts  and  communities, 
by  the  gross  inequalities  which  prevail  under  the  present 
system.1  In  their  relations  to  the  state  government  these 
districts  are  like  individuals.  For  purposes  of  taxation 
they  are  obliged  to  report  to  the  authorities  of  the  state 
the  amount  of  property  owned  within  their  limits,  and 
they  are  thus  interested  to  have  this  amount  appear  as 
small  as  possible.  The  assessors,  therefore,  are  under  a 
strong  inducement  to  undervalue  property.  To  assess  it 
at  its  full  value  in  one  district,  while  in  others  it  is  as- 
sessed at  much  less  than  that  value,  is  to  subject  the  first 
district  to  an  unfair  burden.  The  assessors  are  sensible 
of  this  injustice,  and  they  are  aware  that,  if  they  assist 
in  perpetrating  it,  they  will  become  odious  and  not  im- 
probably lose  their  positions.  That  these  considerations 
are  generally  more  potent  than  the  obligation  of  an  oath 
appears  from  the  confessions  of  the  assessors,  and  from 
much  other  evidence.  As  a  rule,  bonds  and  notes  are 
assessed  at  their  full  value,  and  so  are  bank  stocks;  but 


1  The  attitude  of  these  assessors  resembles  that  of  the  English  juries, 
at  a  time  when  the  law  made  it  a  capital  crime  to  steal  in  a  dwelling- 
house  to  the  value  of  forty  shillings.  Rather  than  take  the  life  of  a  fellow 
creature,  guilty  only  of  a  petty  theft,  the  jury  would  declare  the  value 
of  the  goods  taken  to  be  less  than  forty  shillings,  although  it  might  be 
obviously  much  greater.  In  1808  a  jury  found  on  their  oaths  that  a 
£10  Bank  of  England  note  was  worth  only  39s.  Sir  S.  Romilly  cited  in 
Parliament  a  case  in  1732,  where  a  woman  had  stolen  two  guineas  and 
two  half-guineas,  but  the  jury  pronounced  the  total  value  of  the  four 
coins  to  be  1*  under  40s." 


THE  PROPORTIONATE  METHOD          129 

real  estate,  especially  where  the  agricultural  interest  is 
strong,  is  often  greatly  undervalued.  In  this  way  those 
persons  who  are  too  scrupulous  or  too  helpless  to  conceal 
their  ownership  of  certain  forms  of  property  already  taxed 
doubly,  are,  through  the  exemption  of  others,  still  further 
amerced. 

Complaints,  both  official  and  private,  of  these  abuses 
have  been  repeatedly  uttered  in  all  parts  of  the  country. 
We  may  select,  as  an  example  of  prevalent  conditions, 
possibly  at  their  worst,  the  practices  found  to  exist  in  the 
city  of  Chicago,  in  1897^  by  the  Taxpayers'  Defense 
League.  The  inequalities  in  the  assessment  of  the  general 
property  tax,  as  well  as  the  corruption  of  the  assessors, 
disclosed  by  the  investigations  of  this  league,  are  so  ex- 
treme as  to  make  it  seem  almost  incredible  that  any  scrupu- 
lous person  could  carry  on  business,  or  even  own  prop- 
erty, in  that  city.  For  the  purpose  of  decreasing  the  taxes 
payable  to  the  state  and  other  public  corporations,  the 
assessors  of  the  several  taxing  districts  in  Chicago  were 
in  the  habit  of  finding  the  "  fair  cash  value  "  of  real 
estate  to  be  on  the  average  about  one-tenth  of  its  fair 
market  value;  although  the  assessment  of  some  lands  was 
at  tenfold  the  rate  applied  to  others.  In  order  to  raise 
a  tax  amounting  to  one  per  cent  of  the  market  value  of 
property,  it  thus  became  necessary  to  have  a  tax  rate  of 
ten  per  cent.  The  assessors,  however,  in  some  cases  from 
confessedly  corrupt  motives,  often  assessed  certain  owners 
of  personalty  for  its  full  value,  while  they  assessed  others 
notoriously  possessed  of  large  wealth  of  this  kind  for 
trifling  amounts,  or  exempted  them  altogether.  The  rate 
at  which  banks  and  trust  companies  were  assessed  varied 
from  16  per  cent  of  their  total  capital  and  surplus  down 

9 


130  THE  METHODS  OF  TAXATION 

to  nothing.  There  has  been  perhaps,  on  the  whole,  a 
tendency  to  assess  personal  property,  like  real  estate,  at 
about  one-tenth  of  its  value;  but  the  assessments  are 
altogether  arbitrary.  Immunity  has  frequently  been  of- 
fered in  behalf  of  the  assessors;  and  where  taxpayers 
have  refused  to  pay  blackmail,  their  assessments  have  been 
made  almost  confiscatory.1 

When  we  review  the  evidence  that  has  been  accumulated 
on  the  operation  of  laws  enacted  for  the  taxation  of  in- 
tangible property,  and  even  of  personal  property  in  gen- 
eral, the  conclusion  seems  unavoidable  that  such  laws 
necessarily  work  injustice.  In  order  to  carry  them  into 
effect,  assessors  must  be  armed  with  power  to  compel  dis- 
closure; and  this  power  can  be  exercised  only  through 
demoralizing  methods,  and  with  demoralizing  results.  The 
fact  that  such  measures  as  are  perhaps  necessarily  em- 
ployed for  the  detection  of  crime  and  the  recovery  of  stolen 
property,  are  resorted  to  for  the  collection  of  a  tax,  estab- 
lishes a  presumption  that  the  tax  is  inequitable.  Such 
measures  would  never  be  employed  unless  the  tax  were 
actually  collected  from  only  a  part  of  the  persons  com- 
manded to  pay  it.  A  tax  of  this  description,  as  we  have 
seen,  increases  the  burden  of  those  who  pay  it  to  the 
extent  that  the  burden  of  those  who  escape  it  is  dimin- 
ished, and  the  great  expense  of  employing  the  methods 
of  criminal  procedure  increases  this  burden  still  further. 
Treachery  and  deceit  are  the  necessary  weapons  of  spies 
and  informers,  and  these  arts  are  so  infamous  in  the 
estimation  of  mankind  as  to  make  it  improbable  that 
honorable  men  will  be  induced  by  pecuniary  rewards  to 
engage  in  an  occupation  where  they  must  be  employed. 

1  For  details,  see  Appendix  B. 


THE  PROPORTIONATE  METHOD          131 

It  is  not  surprising  therefore  that  men  so  indifferent  to 
the  hatred  and  contempt  of  their  fellows  as  to  follow  this 
base  occupation,  should  be  susceptible  to  bribes,  or  dis- 
posed to  levy  blackmail  when  bribes  are  not  offered.  The 
extent  to  which  corruption  of  this  kind  prevails  is  far 
greater  than  is  supposed  by  those  who  have  not  had  oc- 
casion to  investigate  the  subject,  and  it  is  obviously  likely 
to  be  increased  by  laws  which  enable  informers  to  com- 
pound taxes  at  their  discretion.  No  one  sincerely  de- 
sirous of  attaining  justice  in  the  distribution  of  the  burdens 
of  taxation  can  approve  of  the  employment  of  corrupt 
men,  or  of  corrupting  and  demoralizing  methods  in  the 
administration  of  the  law.1  When  the  information  neces- 
sary to  assess  the  property  for  taxation  can  be  had  only 
by  inducing  the  trusted  agents  of  the  owner  to  betray 
him,  it  seems  much  wiser  to  change  the  law  than  to  have 
the  state  encourage  falsehood  and  deception.  The  con- 
duct of  the  numerous  class  of  persons  whose  intangible 


1  Some  of  the  objections  to  the  preliminary  examination  of  one  not 
yet  charged  with  an  offense  are  stated  by  Prof.  Wigmore  as  follows.  "It 
is  the  innocent  that  need  protection.  Under  any  system  which  permits 
John  Doe  to  be  forced  to  answer  on  the  mere  suspicion  of  an  officer  of 
the  law,  or  on  public  rumor,  or  on  secret  betrayal,  two  abuses  have  always 
prevailed,  and  inevitably  will  prevail:  first,  the  petty  judicial  officer 
becomes  a  local  tyrant  and  misuses  his  discretion  for  political  or  mer- 
cenary or  malicious  ends;  secondly,  a  blackmail  is  practiced  by  those 
unscrupulous  members  of  the  community  who  through  threats  of  in- 
spiring a  prosecution  are  able  to  prey  upon  the  fears  of  the  weak  or  the 
timid."  So  in  the  case  of  one  duly  charged  by  indictment,  and  placed 
on  trial.  Assuming  him  to  be  innocent,  why  should  he  not  be  exam- 
ined? "The  real  objection  is  that  any  system  of  administration  which 
permits  the  prosecution  to  trust  habitually  to  compulsory  self-disclosure  as  a 
source  of  proof  must  itself  suffer  morally  thereby."  The  employment  of 
torture  is  only  an  extreme  application  of  the  theory.  The  Holy  In- 
quisition endeavored  by  every  kind  of  compulsion  to  extort  confession, 
because  then  evidence  was  not  needed  to  establish  guilt.  WIGMORE, 
Evidence,  §  2251. 


132  THE  METHODS  OF  TAXATION 

property  is  not  assessed  may  be  very  reprehensible;  but 
it  is  less  subversive  of  justice  than  the  conduct  of  rulers 
who  endeavor  to  enforce  taxes  considered  unjust  by  those 
on  whom  they  are  levied,  through  methods  which  under- 
mine the  very  foundations  of  confidence.  When  'the  law 
puts  a  premium  on  vice,  obedience  to  law  ceases  to  be 
regarded  as  a  virtue. 

The  policy  of  compelling  taxpayers  to  return  lists  of 
all  their  property  and  its  value,  verified  by  oath,  has  been 
condemned  by  both  reason  and  experience.  In  practice, 
these  methods  of  disclosure  violate  the  rules  that  courts 
have  found  indispensable  to  the  attainment  of  justice. 
They  encourage  perjury,  they  lead  to  the  employment 
of  informers  and  to  the  corruption  of  assessors,  they 
lighten  the  burdens  of  the  strong  and  the  unscrupulous, 
and  they  correspondingly  aggravate  those  of  the  weak  and 
the  conscientious.  These  results  are  so  notorious,  and  even 
so  scandalous,  as  to  make  the  law  a  by-word.  The  inequal- 
ity of  its  operation  causes  men  to  despise  and  detest  their 
government,  and  leads  them  to  think  it  not  only  justifiable 
but  even  praiseworthy  to  elude  its  inquisitorial  proceed- 
ings. Hardly  any  one  denies  the  existence  of  all  these 
evils.  Wherever  we  inquire,  the  testimony  is  overwhelm- 
ing that  compulsory  disclosure  is  so  imperfectly  enforced 
as  to  produce  great  injustice;  and  we  cannot  avoid  the 
conclusion  that  this  method  cannot  be  consistently  sup- 
ported by  those  who  hold  the  attainment  of  justice  to  be 
an  end  in  taxation.1 

1  "The  obvious  method  of  requiring  an  oath  as  to  the  accuracy  of  the 
return,  coupled  with  the  severe  penalties  attached  to  all  perjury,  have 
been  found  by  experience  to  be  of  very  doubtful  expediency.  The  his- 
tory of  taxation  in  the  United  States  has  long  since  established  the  fact, 
on  documentary  evidence,  that  in  that  country  this  requirement  has 


THE  PROPORTIONATE  METHOD          133 

Eor  similar  reasons,  the  proportionate  method  cannot 
be  regarded  as  conforming  to  present  standards  of  justice. 
The  theory  of  justice  which  it  expresses  is  not  accepted 
by  most  men,  even  if  they  acquiesce  in  its  practical  ap- 
plications; and  it  is  so  repugnant  to  the  convictions  of 
a  considerable  number  as  to  make  every  attempt  to  apply 
it  practically  more  and  more  difficult.  Under  these  cir- 
cumstances it  would  be  vain  to  hope  that  any  system  of 
taxation  embodying  this  method  could  be  permanent.  It 
would  be  subjected  to  incessant  attack,  and  even  if  it 
applied  the  method  perfectly,  the  uncertainty  of  its  dura- 
tion would  cause  so  much  injustice  among  many  classes 
as  to  outweigh  the  advantages  of  theoretical  perfection. 
Moreover,  this  method  has  not  only  never  been  applied 
with  any  approach  to  perfection,  but  is  also,  as  we  shall 
see,  apparently  incapable  of  being  so  applied;  and  the 
difficulties  in  the  way  of  its  application  are  of  a  nature 
to  increase  in  the  future.  A  partial  application  of  such 
a  theory,  however,  utterly  negatives  its  claims  to  justice. 
Unless  every  one  is  taxed  in  proportion  to  his  property, 
some  must  be  taxed  too  much  and  others  too  little;  a 
result  in  direct  contradiction  of  the  theory.  Whatever 
the  theoretical  merits  of  the  method  may  be,  it  is  evident 
that  the  general  property  tax  would  carry  it  out  only 
if  all  property  were  assessed  at  its  true  value  and  to  its 
true  owner;  a  result  which  is  nowhere  even  approximately 
attained. 

made  perjury  habitual  in  tax  assessments.  The  danger  of  using  the  oath 
in  connection  with  self-assessment  of  taxes  lies  in  this  fact,  that,  besides 
its  evil  effect  on  morals,  it  still  further  increases  the  inequality  of  assess- 
ments ;  one  part  of  the  taxpayers  will  have  their  consciences  aroused  by 
the  oath,  while  others  do  not,  so  that  the  inequality  to  be  expected 
under  any  system  of  self-assessment  will  simply  be  augmented."  COHN, 
Science  of  Finance,  p.  618. 


134  THE  METHODS  OF  TAXATION 

Moved  partly  by  the  desire  to  remedy  the  conspicuous 
injustice  of  "  double  taxation/7  and  partly  by  the  disposi- 
tion to  make  taxation  progressive,  or  degressive,  legisla- 
tures have  specifically  exempted  certain  forms  of  property, 
with  the  result  of  making  the  operation  of  the  general 
property  tax  even  more  unequal.  Sufficient  furniture 
for  an  ordinary  household,  sufficient  food,  clothing  and 
fuel  for  ordinary  requirements,  together  with  the  im- 
plements and  stock  necessary  for  a  livelihood,  are  every- 
where relieved  from  taxation.  For  similar  reasons,  as 
well  as  for  several  others,  deposits  in  savings  banks  and 
the  investments  of  many  insurance  companies,  are  in  some 
states,  not  taxed;  and,  as  we  have  observed,  the  bonds 
of  various  governing  bodies  are  by  their  terms  untaxable. 
The  value  of  the  securities  thus  withdrawn  from  assess- 
ment is  collectively  enormous;  and,  however  wise  the 
policy  of  such  exemption  may  be,  it  must  necessarily  re- 
sult in  increasing  the  taxes  on  non-exempt  property.  Vast 
quantities  of  merchandise  are  exempt  under  the  provi- 
sions of  the  Constitution  of  the  United  States  relating  to 
commerce;  great  sums  of  money  are  exempt  either  for 
the  same  reason,  or  because  the  attempt  to  tax  them  would 
demoralize  all  industry.  It  should  be  added  that  while 
it  is  the  rule  not  to  tax  directly  the  owners  of  the  stocks 
of  corporations,  when  the  corporation  is  taxed  on  what  it 
owns,  this  is  not  the  rule  concerning  bonds;  while  some 
states  tax  their  citizens  on  their  holdings  of  stock  in  for- 
eign corporations.  The  popular  outcry  that  personal  prop- 
erty evades  taxation  is  usually  an  ignorant  one.  By  far 
the  greater  part  of  such  property  is  in  some  states  exempt 
by  law;  but  the  burden  thrown  upon  the  holders  of  the 
remainder  may  thus  be  correspondingly  aggravated. 


THE  PROPORTIONATE  METHOD          135 

As  the  exemption  of  many  forms  of  property  defeats 
the  purpose  of  the  general  property  tax,  so  the  imposi- 
tion of  additional  taxes  effects  a  similar  result.  Assum- 
ing that  the  aim  of  the  proportionate  method  would  be 
attained  under  such  a  general  tax,  the  equality  of  burdens 
is  obviously  disturbed  by  any  increase  in  the  burdens  of 
particular  individuals  or  classes.  During  recent  years, 
the  number  of  new  taxes  imposed  has  been  considerable, 
and  their  amount  has  materially  increased.  Most  of  them 
are  of  the  nature  of  licences,  or  taxes  imposed  on  certain 
forms  of  industry.  The  government  may  permit  indi- 
viduals to  do  certain  things  which  they  could  not  lawfully 
do  without  that  consent,  and  exact  a  payment  for  its  per- 
mission or  licence.  Or  it  may  forbid  individuals  to  con- 
tinue to  do  things  which  they  might  lawfully  have  done, 
unless  they  pay  for  the  privilege.  According  to  the  com- 
mon law,  men  cannot  associate  themselves  in  a  business  of 
which  they  share  the  profits  without  entering  into  partner- 
ship. But  every  partner  is  liable  for  the  debts  of  the 
partnership  to  the  extent  not  only  of  what  he  has  con- 
tributed thereto,  but  also  of  his  whole  private  estate. 
Under  these  conditions,  no  one  possessing  money  and  com- 
mon sense  will  enter  into  partnership  except  with  men 
whom  he  knows  to  be  trustworthy.  Many  persons,  how- 
ever, have  money  which  they  wish  to  invest,  and  many 
have  talents  and  experience  which  they  wish  to  employ. 
To  permit  such  men  to  combine  is  so  evidently  advantage- 
ous to  industry  that  the  law  of  unlimited  liability  has 
been  modified.  Men  may  now  form  partnerships,  called 
corporations,  with  the  assurance  that  they  can  at  worst 
lose  only  the  amount  actually  invested  in  the  enterprise. 
The  enormous  extent  to  which  this  device  is  employed 


136  THE  METHODS  OF  TAXATION 

shows  its  necessity  in  our  modern  industrial  system ;  and 
it  at  the  same  time  suggests  to  our  legislatures  the  pos- 
sibility of  utilizing  this  necessity  as  a  source  of  revenue. 

We  accordingly  find  that  the  legislation  of  recent  years 
has  been  fruitful  of  all  kinds  of  taxes  on  corporations. 
The  nature  and  extent  of  these  taxes  need  not  here  be 
considered,  but  it  is  undeniable  that  they  constitute  a 
burden  of  appreciable  weight,  and  must  materially  alter 
the  proportion  which  the  burden  of  taxation  has  borne 
to  the  property  of  the  citizens  at  large.  The  taxes  levied 
on  railroad  companies  in  the  State  of  New  York  amount 
to  nearly  two-thirds  of  their  dividends,  and  those  on  in- 
surance companies  are  frequently  equal  to  their  premium 
receipts.  It  is  clear  that  these  taxes  must  fall,  in  the  first 
instance,  either  on  the  owners  of  the  stock  of  these  com- 
panies, through  the  reduction  of  their  dividends,  or  on 
passengers  and  freight;  or  on  those  who  insure  their  pos- 
sessions, through  the  increase  of  their  premiums;  or  be 
distributed  among  these  classes.  In  the  same  way,  the 
fees  derived  from  licences  to  carry  on  particular  trades, 
and  especially  the  traffic  in  alcoholic  drinks,  must  disturb, 
and  often  very  greatly  disturb,  the  equality  of  burdens 
contemplated  by  the  general  property  tax. 

And,  finally,  all  possible  claim  that  proportionate  taxa- 
tion is  secured  through  the  general  property  tax  is  disposed 
of  by  the  establishment  of  a  system  of  taxation,  based  upon 
a  different  principle,  by  the  action  of  the  general  govern- 
ment. The  taxes  levied  under  this  system  have  no  rela- 
tion to  the  amount  of  property  owned  by  those  who  pay 
them,  or  to  the  revenue  of  such  persons.  They  are  taxes 
assessed  on  certain  kinds  of  goods,  and  are  presumptively 
paid  by  the  consumers  of  such  goods,  not  in  proportion  to 


THE  PROPORTIONATE  METHOD          137 

their  revenue,  but  in  proportion  to  their  consumption  or 
expense.  Such  expense  may  sometimes  be  in  proportion 
to  the  revenue  of  the  consumer,  but  it  is  frequently  alto- 
gether disproportionate  thereto.  The  most  notable  example 
is  afforded  by  the  tax  on  imported  sugar.  The  effect  of 
this  tax  is  to  make  the  price  of  sugar  to  the  consumer  much 
greater  than  what  the  producer  receives,  and  as  the  quan- 
tity consumed  is  very  large,  the  burden  is  both  individually 
and  collectively  very  heavy.  The  amount  expended  by  a 
rich  man  for  sugar,  however,  must  be  insignificant  in  pro- 
portion to  his  other  expense,  while  in  the  case  of  a  poor 
man  this  proportion  is  very  considerable./  This  tax,  there- 
fore, which  amounts  to  some  fifty  million  dollars  in  duties, 
and  as  much  more  in  "protection"  to  the  producers  of 
beet  sugar  and  to  the  planters  of  Hawaii,  Porto  Rico,  and 
Cuba/teems  to  be  altogether  inconsistent  with  the  propor- 
tionate method,  falling  lightly  on  the  rich,  and  heavily, 
on  the  poor. 


CHAPTER   V 

INCOME  TAXES 

SINCE  the  difficulties  in  the  way  of  an  equal  assessment 
of  all  property  appear  to  be  insuperable,  and  since  the 
proportionate  method  can  be  carried  out  only  through  such 
an  assessment,  it  might  seem  that  we  were  justified  in  con- 
cluding at  once  that  proportionate  taxation  is  impracti- 
cable. We  might  go  further  than  this,  and  conclude  that 
progressive  taxation  is  likewise  impracticable,  for  it  does 
not  appear  how  it  can  be  justly  applied  unless  the  assessors 
are  able  to  learn  the  amount  of  the  property  of  every  citi- 
zen —  knowledge,  as  we  have  seen,  the  acquisition  of  which 
is  quite  beyond  the  power  of  government.  It  is  conceiv- 
able, however,  that  revenue  may  be  more  ascertainable 
than  property ;  that  the  amount  of  the  income  of  every  one 
may  somehow  be  known,  although  the  amount  of  his  pos- 
sessions eludes  discovery.  Various  measures  of  taxation 
based  on  this  theory  have  been  devised,  and  are  now  in 
general  use,  the  most  important  of  which  are  those  com- 
prised under  the  name  of  the  income  tax. 

Although  such  taxation  is  not  now  employed  by  our 
government,  it  is  an  established  feature  of  the  English 
system,  and  it  will  be  instructive  to  examine  its  operation 
in  that  country.  The  conditions  prevailing  there  are  on 
the  whole  much  more  similar  to  our  own  than  those  of 
other  lands.  Our  political  institutions,  and  the  great  body 
of  our  law,  are  of  English  origin.  What  is  most  impor- 
tant, the  general  attitude  of  both  peoples  toward  govern- 


INCOME  TAXES  139 

ment  is  the  same.  Both  are  disposed  to  maintain  what  they 
call  their  liberties;  those  prerogatives  of  the  individual 
subject  which  rulers  are  compelled,  by  tradition  as  well 
as  by  constitutional  restraints,  to  regard.  The  peoples  of 
Europe  have  had  no  such  defense  against  despotism,  and 
as  they  have  not  been  trained  to  take  pride  in  the  successful 
resistance  of  their  ancestors  to  the  encroachments  of  arbi- 
trary power,  they  have  little  of  what  we  are  fond  of  calling 
the  independent  spirit  of  freemen.  Hence  they  endure 
governmental  regulation  and  interference  with  a  submis- 
siveness  which  Englishmen  can  scarcely  comprehend,  and 
which  they  would  certainly  not  imitate.  We  cannot,  there- 
fore, reason  safely  from  the  analogy  of  these  countries. 
Measures  that  operate  successfully,  where  neither  law  nor 
tradition  encourage  the  subject  to  maintain  an  independent 
attitude  toward  his  rulers,  may  fail  where  a  sturdier  spirit 
prevails.  For  our  purposes,  the  most  useful  lessons  are  to 
be  drawn  from  English  experience ;  and  this  is  peculiarly 
true  of  measures  that  have  been  adopted  after  careful  and 
intelligent  deliberation. 

Although  the  injustice  resulting  from  the  general  prop- 
erty tax,  as  commonly  and  perhaps  necessarily  adminis- 
tered, has  caused  many  writers  to  look  with  favor  upon  the 
income  tax,  yet,  as  a  tax  on  property  is  presumptively  paid 
out  of  income  from  that  property,  and  as  the  value  of 
property  is  generally  regulated  by  its  capacity  to  produce 
income,  it  might  seem  that  a  tax  upon  income  was  the  same 
as  a  property  tax.  It  differs,  however,  in  the  respect  that 
many  persons  who  own  little  property  have  incomes  arising 
from  the  services  which  they  render  to  the  community. 
The  collective  income  of  common  laborers  is  enormous, 
but  their  property  holdings  are  comparatively  small.  Many 


140  THE  METHODS  OF  TAXATION 

professional  men  have  large  incomes,  but  comparatively 
little  realized  property.  Many  merchants  and  manufac- 
turers borrow  much  of  their  capital,  and  their  incomes  may 
be  out  of  all  proportion  to  the  property  which  they  own. 
The  number  of  persons  in  receipt  of  regular  salaries  has 
in  modern  times  become  very  great,  and  many  of  them  have 
no  other  means  of  subsistence.  It  is  reasoned,  therefore, 
that  the  proportionate  method  of  taxation  requires  that  this 
large  and  increasing  class  of  persons  should  contribute  to 
the  support  of  the  government.  For  it  is  to  be  observed 
that  Adam  Smith's  first  maxim  declares  that  subjects 
should  contribute,  not  in  proportion  to  their  property,  but 
in  proportion  to  the  revenue  that  they  enjoy  under  the 
protection  of  their  government. 

But  when  we  consider  the  sources  of  this  revenue,  we  are 
confronted  at  the  outset  with  a  serious  perplexity.  For, 
as  we  shall  see,  incomes  as  well  as  property  may  be  classi- 
fied as  earned  or  unearned,  and  to  tax  all  classes  alike 
would  seem  to  offend  against  the  prevailing  conceptions  of 
justice.  On  the  other  hand,  to  exempt  from  taxation  those 
who  possess  incomes  but  not  property  appears  to  many  per- 
sons clearly  inequitable.  The  perplexity  is  illustrated  by 
some  observations  made  by  Professor  F.  W.  Taussig. 
Speaking  of  the  property  tax,  he  remarks : 

"  One  man  has  little  property,  but  earns  a  handsome  income 
from  a  lucrative  profession;  another  man,  or  perhaps  a  frail 
woman,  also  has  a  little  property  and  is  dependent  on  this  alone 
for  a  slender  livelihood.  Are  both  to  be  taxed  alike?  The 
same  disproportion  appears  when  one  man  uses  property  in 
business  operations  as  a  means  of  earning  an  income  from  com- 
bined labor  and  capital,  while  another  has  a  simple  investment 
or  domicile  of  his  own." 


INCOME  TAXES  141 

To  arrive  at  a  satisfactory  solution  of  such  problems, 
however,  it  is  important  to  compare  parallel  cases,  and  the 
instances  given  above  are  plainly  not  parallel.  Let  us 
suppose  rather  that  there  are  two  frail  women,  one  of  whom 
supports  herself  by  sewing,  or  washing,  while  the  other 
depends  entirely  on  the  income  from  a  small  property.  It 
seems  probable  that  most  men  would  think  it  more  just 
to  tax  the  woman  who  presumptively  renders  no  service 
to  society,  rather  than  the  one  who  earns  her  income  by 
severe  toil.  Or  we  may  compare  the  man  who  earns  a 
handsome  income  as  a  physician,  with  one  who  has  an 
equal  income  from  investments.  Here,  too,  most  men 
would  probably  think  it  more  just  to  tax  the  man  who  does 
not  work,  rather  than  him  who  does ;  especially  when  the 
receipt  of  the  professional  income  implies  years  of  prelim- 
inary study,  during  which  there  has  been  much  outlay 
and  no  income  at  all.  To  a  considerable  extent  the  same 
judgment  might  obtain  concerning  two  men,  one  in  ac- 
tive business,  and  the  other  not;  one  deriving  his 
income  from  skillful  management  and  assiduous  industry, 
the  other  from  wealth  which  he  may  have  had  no  part  in 
producing. 

In  such  cases  the  property  tax  is  presumptively  levied  on 
the  land  and  goods  of  the  man  in  business,  and  his  profits 
are  what  is  left  after  paying  this  and  other  expenses. 
They  may  be  regarded  as  measuring  the  value  of  the  serv- 
ices which  he  renders  to  his  customers,  and  it  is  quite  con- 
ceivable that  the  attempt  to  reduce  his  remuneration,  even 
if  it  seemed  just,  might  not  be  successful.  For,  assuming 
the  total  burden  of  taxation  to  remain  the  same,  income 
taxes  would  tend  to  diminish  that  part  of  the  burden  borne 
by  those  who  derive  their  income  from  property,  and  to 


142  THE  METHODS  OF  TAXATION 

increase  that  borne  by  those  who  are  paid  for  services. 
It  is  at  least  possible  that  the  latter  class  might  increase 
the  charges  for  their  services  until  the  former  equilibrium 
was  restored.  Denning  laborers,  loosely,  as  those  who  use 
no  capital,  but  obtain  their  income  by  selling  their  services, 
it  is  evident  that,  in  the  opinion  of  the  public,  justice 
does  not  demand  the  taxation  of  such  income.  Those 
other  members  of  the  community  who  render  services  for 
pay  must  employ  capital,  either  owned  or  borrowed,  upon 
which  they  already  pay  taxes,  the  reduction  of  which  would 
only  in  part  compensate  them  for  their  payment  of  an  in- 
come tax.  It  seems  probable,  therefore,  that  a  tax  of  this 
kind  would  result  either  in  such  an  increase  of  income 
from  services  as  would  tend  to  reestablish  the  present 
equilibrium,  in  which  case  it  would  depend  on  fiscal  rea- 
sons for  its  justification;  or  else  that  it  would  increase  the 
incomes  of  those  who  depend  on  accumulated  property, 
at  the  expense  of  those  who  render  services  to  the  com- 
munity, a  result  which  conflicts  with  prevalent  theories  of 
justice. 

Moreover  the  equal  taxation  of  incomes,  like  the  equal 
taxation  of  property,  cannot  result  in  any  equality  of  sac- 
rifice. The  necessary  expenses  of  two  men  receiving  the 
same  income,  like  those  of  two  men  of  equal  property,  may 
be  very  different  in  amount,  and  a  tax  which  would  be 
scarcely  felt  by  one  may  be  a  grievous  burden  to  the  other. 
The  income  tax,  furthermore,  unless  assessed  in  a  very 
scientific  and  complicated  manner,  causes  an  additional 
inequality  of  sacrifice.  The  incomes  of  a  very  large  num- 
ber of  persons  certainly  cease  at  their  death,  and  as  their 
abilities  generally  decline  before  they  die,  their  incomes 
also  diminish,  if  they  do  not  altogether  disappear.  A  tax 


INCOME  TAXES  143 

on  incomes  derived  from  terminable  annuities,  or  from 
personal  earnings  of  every  description,  is  thus  a  heavier 
burden  than  an  equal  tax  on  incomes  arising  from  realized 
property.  In  the  former  case  it  is  necessary,  in  order  to 
provide  for  subsistence  during  a  period  of  incapacity,  and 
for  the  support  of  the  family,  to  save  a  part  of  the  income, 
while  in  the  latter  case  the  whole  of  it  may  be  spent  with- 
out improvidence  or  injustice  to  those  who  are  dependent. 
Many  plans  have  been  suggested  for  the  correction  of 
this  inequality,  such  as  the  exemption  of  income  de- 
voted to  life  insurance,  and  other  forms  of  saving,  but 
the  difficulty  of  applying  such  plans,  except  in  a  gen- 
eral way,  makes  it  impossible  to  prevent  injustice  in 
particular  cases.  /•  / 

For  more  than  two  generations^pamament  has  strug- 
gled with  the  problem '  of  distinguishing  between  earned 
and  unearned  incomes.  It  is  easy  to  make  the  distinction 
in  particular  cases.  To  formulate  a  general  principle  has 
hitherto  seemed  impossible.  Nevertheless  the  attempt  has 
at  last  been  made,  and  since  1907  what  are  called  earned 
incomes  under  £2000  (or  those  parts  of  incomes  of  that 
amount  which  are  earned)  are  taxed  at  nine-pence  instead 
of  one  shilling.  The  distinction,  however,  must  be  of  a 
very  arbitrary  character.  The  income  of  a  lawyer  or  of  a 
physician,  so  far  as  it  consists  of  fees,  may  be  properly 
enough  said  to  be  earned.  But  professional  men  having 
families  must  provide  for  their  future.  Some  of  the 
earned  income  must  be  saved  and  invested,  and  it  seems 
unjust  to  treat  the  income  arising  from  such  investments 
as  unearned.  To  tax  it  is  to  discriminate  in  favor  of  ex- 
travagant living,  and  to  discourage  men  from  laying  bv 
a  part  of  their  earnings,  that  when  they  become  feeble 


144  THE  METHODS  OF  TAXATION 

they  may  not  suffer  want,  and  that  when  they  die  their 
families  may  not  be  left  destitute. 

A  man  engaged  in  trade  may  be  said  to  earn  his  income. 
But  he  may  cease  to  be  active,  while  his  capital  remains 
in  his  business.  He  may  thus  continue  to  receive  an  in- 
come which  would  be  classed  as  earned,  but  which  is  not 
earned  by  his  labor,  as  it  was  before.  Or  he  may  turn 
his  business  into  a  stock  company,  while  continuing  to 
carry  it  on  himself,  and  thus  earn  his  income  as  much  as 
ever  he  did.  Apparently,  however,  he  is  now  living  on  the 
proceeds  of  an  investment,  and  his  income  might  be  classed 
as  unearned.  Strictly  speaking,  only  such  income  is  un- 
earned as  comes  to  its  owner  because  of  no  effort,  past  or 
present,  on  his  part.  Such  may  often  be  the  income  of 
the  recipient  of  a  large  legacy;  but  even  here  the  legatee 
may  have  rendered  some  service  to  his  deceased  benefactor. 
The  mere  fact  that  the  estate  of  the  decedent  is  large  can- 
not of  itself  establish  any  presumption  that  the  legatees, 
especially  if  their  portions  are  small,  have  done  nothing 
to  earn  what  they  receive.  In  so  far  as  insurance  is 
effected  against  the  death  duties,  they  really  constitute  an 
income  tax.  They  may  therefore  be  equivalent  to  a  tax  on 
the  savings  of  industrious  and  prudent  men;  that  is,  on 
their  earned  income,  capitalized. 

Fortunately  for  our  purpose,  the  conformity  of  the  in- 
come tax  to  recognized  principles  of  justice  has  been  con- 
sidered by  some  of  the  most  enlightened  English  statesmen. 
Mill,  Fawcett,  and  Gladstone  have  all  treated  the  subject, 
and  their  reasoning  has  not  been  affected  by  the  lapse  of 
time.  We  have  hitherto  assumed  it  to  be  comparatively 
immaterial  whether  a  tax  was  imposed  on  property,  or  on 
revenue,  and  have  treated  Adam  Smith's  first  maxim  as  if 


INCOME  TAXES  145 

it  was  illustrated  by  the  general  property  tax.  While  it  is 
true  that  a  tax  on  property  is  practically  a  tax  on  the 
revenue  which  the  property  produces,  true  even,  in  one 
sense,  that  all  revenue  is  ultimately  derived  from  property, 
it  is  obvious  that  much  revenue  is  received  as  direct  com- 
pensation for  labor  or  service,  and  that  those  who  receive 
it  may  own  little  or  nothing  subject  to  a  property  tax. 
The  income  tax,  therefore,  as  it  affects  all  forms  of  revenue 
alike,  seems  more  equitable  than  the  property  tax,  and 
apparently  conforms  precisely  to  the  principle  stated  by 
Adam  Smith.  Yet  when  we  consider  the  sources  of  rev- 
enue, we  have  already  observed  that  the  situation  of  a  man 
whose  income  is  derived  from  accumulated  wealth  is  very 
different  from  that  of  one  who  depends  on  his  daily  labor. 
The  latter  is  under  the  strongest  inducement  to  save  a 
portion  of  his  earnings  in  order  to  provide  for  the  sup- 
port of  his  family  in  case  of  his  death,  or  for  his  own  sup- 
port after  he  becomes  incapacitated.  The  former  is  under 
no  such  compulsion,  and  his  income  is  substantially  to  that 
extent  greater.  But  if  we  try  to  determine  how  much 
greater,  we  find  the  problem  extremely  complex.  For  the 
property  of  one  man  may  be  of  very  uncertain  value,  re- 
garded as  a  permanent  investment,  as  in  the  case  of  a  mine, 
or  a  ship,  or  even  a  house ;  while  that  of  another  may  be 
almost  absolutely  secure.  The  revenue  derived  from  prop- 
erty of  the  former  class  may  be  very  much  greater  than 
that  from  the  latter;  or,  to  state  the  case  more  precisely, 
equal  incomes  may  be  derived  from  principal  funds  of 
very  unequal  values.  The  larger  income  implies  a  greater 
risk  of  losing  the  principal,  a  risk  which  should  be  cov- 
ered by  insurance,  as  in  the  case  of  income  derived  from 

daily  service. 

10 


146  THE  METHODS  OF  TAXATION 

At  the  present  time  a  loan  or  investment  which  is,  in 
human  estimation,  entirely  safe,  will  perhaps  produce  a 
return  of  three  or  four  per  cent,  while  some  fairly  secure 
stocks  pay  eight  or  even  ten  per  cent  on  their  market  price. 
So  money  invested  in  trade,  although  in  this  case  there  is 
an  element  of  service  to  be  considered,  often  yields  a  profit 
of  fifteen  or  twenty  per  cent.  No  wise  man  acts  on  the 
presumption  that  these  precarious  revenues  will  always 
continue ;  he  prepares  for  possible  and  even  probable  loss, 
by  saving,  and  his  available  income  is  only  what  is  left 
after  he  has  subtracted  a  proper  allowance  for  the  risk 
that  he  is  taking.  A  great  part,  if  not  the  greater  part,  of 
the  capital  employed  in  trade  is  borrowed,  and  a  great  part 
of  the  revenue  which  it  produces,  while  commonly  regarded 
as  the  income  of  the  borrower,  is  properly  that  of  the 
lender.  Some  men  invest  in  terminable  annuities;  they 
secure  an  income  for  life  by  sacrificing  the  whole  of  their 
principal.  Such  income  is  evidently  not  the  same  as  that 
which  leaves  the  principal  intact ;  it  consists  in  great  part 
of  payments  made  out  of  principal,  and  he  who  receives  it 
has  no  means  of  meeting  an  unforeseen  increase  in  his 
expenses.  The  gross  income  from  property  received  by 
any  one  thus  appears  to  be  a  very  imperfect  measure,  either 
of  the  value  of  his  property,  or  of  his  ability  to  contribute 
to  the  support  of  the  government.  And  Mill  contends  that 
to  tax  that  part  of  incomes  which  is  saved  and  reinvested 
involves  double  taxation. 

Much  the  same  is  true  of  income  derived  from  labor  or 
services.  In  the  case  of  young  men,  such  income  may  be 
earned  for  many  years,  and  may  reasonably  be  expected 
to  increase  for  a  part  of  that  period.  Yet  the  vicissitudes 
of  life  are  so  numerous  that  we  commonly  praise  young 


INCOME  TAXES  147 

men  who  do  not  spend  all  that  they  earn,  but  save  enough 
to  provide  insurance  against  the  more  common  forms  of 
disaster.  With  advancing  years  and  declining  strength, 
it  is  clear  that  such  income  tends  to  decrease,  and  it  may 
be  regarded,  like  a  life  annuity,  as  drawn  in  part  at  least 
from  principal.  In  certain  occupations,  such  as  those  of 
writers  and  actors,  income  depends  very  much  on  the  favor 
of  the  public,  and  unless  very  large  deductions  are  made 
to  provide  against  the  vagaries  of  popular  taste,  affluence 
may  suddenly  give  place  to  positive  want.  In  manufac- 
tures and  in  trade  in  general,  similar  precautions  should 
be  indispensable,  as  we  may  infer  from  the  great  number 
of  commercial  failures.  The  profits  of  one  year  are  fre- 
quently swept  away  by  the  losses  of  another,  and  a  great 
part  of  such  profits  should  be  set  aside  as  a  reserve,  and 
not  treated  as  income  available  for  expenditure.  Other 
illustrations  might  be  added,  but  these  are  sufficient  to 
show  that  a  tax  on  income  in  general  is  so  extremely  un- 
equal in  its  operation  as  to  be  hardly  reconcilable  with 
ordinary  standards  of  justice.  It  may  put  a  premium  on 
improvidence,  and  increase  the  inherent  inequalities  of 
natural  conditions. 

This  conclusion  is  confirmed  when  we  observe  the  dif- 
ferences in  the  demands  on  the  incomes  of  different  men. 
One  may  be  charged  with  the  support  of  his  parents  and  of 
his  wife  and  children,  while  another  may  have  no  one  to 
maintain  but  himself.  In  the  former  case  the  income 
which  is  regarded  by  the  law  as  belonging  to  the  head  of 
the  family,  belongs  really  to  all  its  members ;  and  in  this 
case  also  the  importance  of  the  life  of  the  "  bread-winner  " 
requires  that  some  of  his  income  be  devoted  to  its  insur- 
ance. The  greatest  differences  also  exist  in  the  health,  in 


148  THE  METHODS  OF  TAXATION 

the  ability,  and  in  the  industry  of  men  whose  income  is 
the  same ;  and  in  their  needs  there  are  corresponding  dif- 
ferences. Some  men  earn  money  easily,  but  live  with 
great  frugality.  Others  are  prone  to  wear  themselves  out 
with  hard  work,  which  they  can  endure  only  if  they  live 
in  a  generous  way.  These  differences  cannot  be  offset,  one 
against  another;  they  are  often  combined  in  such  a  man- 
ner as  to  make  the  conditions  of  life  either  extremely  easy, 
or  almost  intolerably  burdensome.  There  is  no  semblance 
of  justice  in  taxing  at  the  same  rate  two  equal  incomes, 
one  of  which  is  drawn  as  interest  from  sound  investments 
by  a  vigorous  man  having  few  needs  and  no  family,  while 
the  other  is  earned  with  the  most  painful  toil  by  a  person 
in  frail  health,  who  must  out  of  it  provide  not  only  for  the 
present  sustenance  of  half  a  dozen  dependents,  but  also  for 
their  future  support  in  the  event  of  his  death. 

The  equal  taxation  of  incomes,  therefore,  may  result  in 
greater  inequality  of  sacrifice  than  the  equal  taxation  of 
property.  The  property  tax  falls  lightly  on  the  largest 
class  of  all,  the  laborers;  but  an  income  tax  must  be  de- 
ducted from  their  wages.  The  property  tax  affects  what 
has  been  called  "  spontaneous  "  income ;  it  reduces  income 
for  which  the  recipient  may  have  in  many  cases  expended 
no  labor,  while  it  does  not  seem  to  touch  the  "  industrial " 
income,  which  is  the  recompense  paid  by  society  for  present 
services.  The  income  tax  falls  indiscriminately  on  both 
species  of  revenue.  The  property  tax,  so  far  as  it  is  levied 
on  real  estate,  does  not  differ  materially  from  a  tax  on 
income  derived  from  rent,  and  is  no  more  unjust  than 
such  a  tax.  In  so  far  as  the  property  tax  is  levied  on  tan- 
gible personalty,  it  is  similar  to  a  tax  on  the  income  from 
such  property,  and  one  tax  seems  as  just  as  the  other.  The 


INCOME  TAXES  149 

results  of  attempting  to  tax  intangible  property  we  have 
examined  at  length,  and  there  is  no  obvious  reason  why  the 
results  of  attempting  to  tax  the  income  of  such  property 
should  be  different,  or  why  the  same  injustice  should  not 
be  caused  in  either  case.  Kents,  wages,  and  salaries,  it  is 
true,  can  to  some  extent  be  determined  by  the  inspection 
of  the  assessor.  Their  amount  is  frequently  a  matter  of 
record,  and  always  a  matter  of  agreement  between  two  or 
more  parties,  both,  or  all,  of  whom  must  concur  in  order 
to  conceal  the  true  character  of  the  transaction.  Taxes 
on  these  sources  of  revenue,  therefore,  might  be  assessed 
with  some  approach  to  completeness.  Provided  the  asses- 
sors were  faithful,  they  could  generally  ascertain  what 
rents  and  salaries  were  paid,  without  insisting  on  disclo- 
sure by  the  recipients;  and  in  the  case  of  wages  the  ac- 
counts of  corporations  would  furnish  satisfactory  evi- 
dence. But  the  profits  of  a  business  or  profession  cannot 
always  be  accurately  estimated.  Many  assets  are  of  uncer- 
tain value,  many  debts  are  doubtful,  many  enterprises 
require  years  for  successful  —  or  unsuccessful  —  comple- 
tion, and  many  persons  in  business,  in  small  ways  as  well 
as  large,  do  not  themselves  really  know  how  they  stand. 
But  if  the  profits  of  a  business  are  often  scarcely  known 
to  its  owner  and  manager,  they  are  not  likely  to  be  known 
to  any  one  else,  and  are  certainly  not  ascertainable  by  the 
inspection  of  the  assessor.  On  this  point  Mill's  observa- 
tions are  as  correct  now  as  when  they  were  first  made.  He 


"  Notwithstanding,  too,  what  is  called  the  inquisitorial  na- 
ture of  the  tax,  no  amount  of  inquisitorial  power  which  would 
be  tolerated  by  a  people  the  most  disposed  to  submit  to  it,  could 
enable  the  revenue  officers  to  assess  the  tax  from  actual  knowl- 
edge of  the  circumstances  of  contributors.  Eents,  salaries, 


150  THE  METHODS  OF  TAXATION 

annuities,  and  all  fixed  incomes,  can  be  exactly  ascertained. 
But  the  variable  gains  of  professions,  and  still  more  the  profits 
of  business,  which  the  person  interested  cannot  always  himself 
exactly  ascertain,  can  still  less  be  estimated  with  any  approach 
to  fairness  by  a  tax  collector.  The  main  reliance  must  be 
placed,  and  always  has  been  placed,  on  the  returns  made  by  the 
person  himself.  No  production  of  accounts  is  of  much  avail, 
except  against  the  more  flagrant  cases  of  falsehood ;  and  even 
against  these  the  check  is  very  imperfect,  for  if  fraud  is  in- 
tended, false  accounts  can  generally  be  framed  which  it  will 
baffle  any  means  of  inquiry  possessed  by  the  revenue  officers  to 
detect ;  the  easy  resource  of  omitting  entries  on  the  credit  side 
being  often  sufficient  without  the  aid  of  fictitious  debts  or  dis- 
bursements. The  tax,  therefore,  on  whatever  principles  of 
equality  it  may  be  imposed,  is  in  practice  unequal  in  one  of  the 
worst  ways,  falling  heaviest  on  the  most  conscientious.  The 
unscrupulous  succeed  in  evading  a  great  proportion  of  what 
they  should  pay;  even  persons  of  integrity  in  their  ordinary 
transactions  are  tempted  to  palter  with  their  consciences,  at 
least  to  the  extent  of  deciding  in  their  own  favor  all  points  on 
which  the  smallest  doubt  or  discussion  could  arise ;  while  the 
strictly  veracious  may  be  made  to  pay  more  than  the  state  in- 
tended, by  the  powers  of  arbitrary  assessment  necessarily  in- 
trusted to  the  commissioners  as  the  last  defense  against  the 
taxpayer's  power  of  concealment.  It  is  to  be  feared,  therefore, 
that  the  fairness  which  belongs  to  the  principle  of  an  income 
tax  cannot  be  made  to  attach  to  it  in  practice ;  and  that  this 
tax,  while  apparently  the  most  just  of  all  modes  of  raising  a 
revenue,  is  in  effect  more  unjust  than  many  others  which  are 
prima  facie  more  objectionable."  Pol.  EC.,  Book  V,  Chap.  II, 
§5.' 

1  Mr.  Gladstone  condemned  this  tax  even  more  emphatically.  In  his 
budget  speech,  in  1853,  he  expressed  himself  as  follows:  "Even  if  you 
could  remove  the  inequalities,  there  would  still  remain,  in  my  mind  at 
least,  objections  to  it  of  the  gravest  character.  The  machinery  of  the  in- 
come tax,  involving,  as  it  necessarily  does,  to  so  large  an  extent,  the 
objectionable  principle  of  self-assessment,  can  never  be  satisfactory  to 
the  country.  First,  because  self-assessment  leads  to  grievous  frauds 
upon  the  revenue,  and  renders  the  real  inequality  of  the  tax  far  greater 


INCOME  TAXES  151 

The  propriety  of  this  criticism  has  been  established  by 
experience.  On  several  occasions  facts  have  been  inciden- 
tally brought  to  light  which  prove  that  the  injustice  de- 
scribed by  Mill  is  very  extensive,  and  enable  us  to  estimate 
its  degree  with  some  approach  to  accuracy.  In  order  to 
comprehend  these  facts,  however,  it  is  necessary  to  under- 
stand that  system  of  taxes  in  England  which  is  incorrectly 
spoken  of  as  "  the  income  tax.'7  In  a  certain  sense,  of 
course,  every  tax  is  an  income  tax.  It  diminishes  the 
income  of  the  person  who  pays  it,  or  of  some  other  person. 
A  tax  on  beer,  for  instance,  must  diminish  the  income  of 
brewers,  or  of  inn-keepers,  or  of  beer  drinkers,  or  of  all 

than  any  of  those  among  its  inequalities  which  immediately  strike  the 
public  eye  and  feelings ;  and,  secondly,  because  of  the  tendency  to  im- 
morality, which  is,  I  fear,  essentially  inherent  in  the  nature  of  the  ope- 
ration. The  public  feeling  of  its  inequality  is  a  fact  most  important  in 
itself.  The  inquisition  it  entails  is  a  most  serious  disadvantage.  And 
the  frauds  to  which  it  leads  are  an  evil  which  it  is  not  possible  to  charac- 
terize in  terms  too  strong.  I  believe  it  does  more  than  any  other  tax 
to  demoralize  and  corrupt  the  people."  Disraeli  declared  "The  odious 
features  of  this  tax  cannot  by  any  means  be  removed  or  modified."  Prof. 
Thorold  Rogers  wrote  in  1884,  "Nobody  defends  the  income  tax.  It 
was  first  imposed  on  the  tyrant's  plea  that  the  administration  cannot  do 
without  it,  and  it  has  been  continued  for  the  same  reason.  Every  Chan- 
cellor of  the  Exchequer  has  condemned  it  in  principle,  and  has  con- 
tinued it  in  practice.  It  is  not  wonderful,  therefore,  that,  fortified  by 
these  avowals,  people  who  can  evade  the  tax  do  so."  D.  A.  Wells,  in 
his  Theory  and  Practice  of  Taxation,  p.  529,  remarks:  "Those  only 
who  were  officially  and  intimately  connected  at  this  time  with  the  In- 
ternal Revenue  Department  of  the  United  States  Treasury  can  form  any 
adequate  idea  of  the  amount  of  perjury  and  fraud  that  characterized 
and  pervaded  the  country  during  the  years  1867  to  1872,  as  the  out- 
come of  the  then  existing  system  of  internal  revenue.  And  American 
ingenuity  was  never  more  strikingly  illustrated  —  not  even  by  the  ex- 
hibits of  the  patent  office  —  than  it  was  at  that  time  in  devising  and 
successfully  carrying  out  methods  for  evading  the  taxes  on  incomes  and 
distilled  spirits."  In  1869,  the  population  being  thirty-seven  millions, 
the  number  of  persons  returning  income  for  taxation  was  about  260,000. 
In  1872,  with  a  population  of  thirty-nine  millions,  the  exemption  having 
been  raised  from  $1,000  to  $2,000,  the  number  of  returns  was  only 
73,000,  and  the  receipts  were  comparatively  insignificant. 


152  THE  METHODS  OF  TAXATION 

three  classes.  A  tax  on  imported  sugar  must  diminish  the 
income  of  the-  importer,  or  of  the  refiner,  or  of  the  con- 
sumer. But  it  would  cause  great  confusion  to  describe 
such  taxes  as  income  taxes,  and  the  term  is  generally  ap- 
plied to  taxes  assessed  directly  on  the  revenue  of  the  indi- 
vidual taxpayer,  whether  that  revenue  be  in  the  form  of 
wages,  or  salaries,  or  rents,  or  interest,  or  profits. 

The  English  system,  however,  assesses  directly  only  in- 
come in  the  shape  of  profits,  and,  in  some  cases,  in  the  shape 
of  salaries  and  interest.  There  is  a  tax  on  salaries  paid 
by  certain  corporations,  but  it  is  assessed  on  the  employer, 
who  may  or  may  not  fix  accordingly  the  amount  which  he 
pays  in  salaries.  There  is  a  tax  on  payments  of  interest 
on  loans  by  governments  and  other  corporations,  which  is 
assessed  on  them,  and  which  may  or  may  not  be  considered 
in  fixing  the  rate  of  interest  paid  on  their  loans.  There 
is  a  tax  on  rents,  assessed  to  the  tenant,  who  may  or  may 
not  pay  a  rent  reduced  by  the  amount  of  the  tax.  Nomi- 
nally, in  all  cases,  the  landlord,  or  the  bondholder,  or  the 
clerk  may  be  charged  with  the  tax,  but  we  cannot  assume 
that  the  tenant,  or  the  debtor,  or  the  employer,  suffers  no 
diminution  of  income  on  account  of  the  tax.  During  the 
war  with  the  Transvaal  Republic,  the  British  Government 
taxed  its  consols  by  increasing  the  income  tax.  But  when 
it  borrowed  it  was  compelled  to  pay  a  much  higher  rate  of 
interest  than  before,  the  price  of  consols  falling  from  112 
to  92,  so  that  the  net  income  received  by  those  who  lent 
it  their  money  was  probably  rather  more  than  it  would  have 
been  had  the  tax  not  been  increased.1 

We  find,  in  fact,  that  many  large  borrowers  covenant 

1  The  interest  on  consols  had  been  reduced  from  3  per  cent  to  2f ,  in 
1888.  It  was  reduced  to  2£  per  cent  in  1903,  and  consols  have  since 
sold  below  84. 


INCOME  TAXES  153 

with  their  creditors  that  the  interest  payable  on  their  loans 
shall  not  be  reduced  by  taxation.  The  government  of  the 
United  States  has  issued  its  bonds  on  these  terms,  and 
many  states  and  municipalities  exempt  their  own  bonds 
from  taxation.  It  is  evident  that  the  authorities  who  con- 
tract these  loans  suppose  that  if  they  were  taxed  the  rate 
of  interest  would  be  increased,  and  they  would  regard  it 
as  a  foolish  proceeding  to  issue  a  loan  at  four  per  cent, 
with  the  proviso  that  one  per  cent  should  be  deducted  as 
an  income  tax.  This,  however,  is  practically  what  is  done 
by  the  British  Government;  and  it  also  makes  the  value 
of  its  obligations  more  speculative  by  leaving  the  lender 
in  uncertainty  as  to  the  rate  at  which  it  will  tax  them. 
This  uncertainty  tends  to  impair  the  value  of  these  stocks, 
while  the  revenue  of  the  government  is  of  course  lessened 
by  the  expense  of  much  needless  bookkeeping. 

This  digression  has  been  introduced  not  to  call  attention 
to  the  diffusion  of  taxes,  a  subject  which  will  require  much 
more  exhaustive  treatment,  but  to  show  that  the  restric- 
tion of  the  meaning  of  "  income,"  in  common  usage,  is 
not  arbitrary.  In  fact  it  would  be  well  to  limit  the  term, 
"  income  tax,"  to  a  tax  on  revenue  that  has  actually  passed 
into  the  possession  of  the  ultimate  owner.  Revenue  in  the 
hands  of  persons  who  have  to  deliver  it  to  others  must  gen- 
erally be  subject  to  some  deductions,  and  it  is  not  always 
easy  to  determine  its  true  amount.  Thus  a  tax  is  imposed 
in  England  on  the  profits  of  railway  corporations,  and  they 
are  authorized  to  assess  this  tax  on  the  fund  out  of  which 
dividends  are  paid  to  stockholders.  In  a  sense  the  stock- 
holders are  taxed  on  their  income,  for  it  would  be  pre- 
sumptively larger  if  there  were  no  tax,  just  as  it  would 
be  larger  if  their  other  taxes  were  removed;  but  the  tax 


154  THE  METHODS  OF  TAXATION 

is  evidently  on  the  business  of  transportation,  and  we  can- 
not assume  that  it  will  be  paid  out  of  the  income  of  rail- 
way stockholders,  and  not  out  of  that  of  those  who  buy 
transportation  of  the  railways. 

No  doubt  it  will  be  observed  that  a  tax  on  the  profits  of 
an  individual  may  be  transferred  to  others,  and  the  con- 
clusion may  be  drawn  that  the  distinctions  pointed  out 
above  are  immaterial.  But  this  conclusion  is  incorrect; 
for  the  profits  of  an  individual  are  what  he  receives  from 
every  source  of  revenue.  To  tax  his  profits  is  therefore 
to  tax  his  whole  net  income;  but  to  tax  his  rents  in  the 
hands  of  one  person,  his  interest  in  the  hands  of  another, 
his  salary  in  the  hands  of  a  third,  may  be  to  lay  a  tax 
on  him  that  has  no  relation  to  his  net  income.  He  may 
have  incurred  losses  which  leave  him  with  no  net  in- 
come; but  these  taxes  continue.  They  should  not  be 
called  income  taxes,  because  the  income  has  disappeared. 
The  income  of  a  banker  is  not  measured  by  the  quan- 
tity of  money  that  comes  in  to  his  till.  That  will  run 
into  the  millions,  while  his  true  income  may  be  but  a  few 
hundreds,  or  even  less  than  nothing.  Like  all  common 
words,  the  word  "  income  "  is  loosely  used ;  but  in  esti- 
mating the  financial  position  of  any  one  it  is  his  net  in- 
come that  is  considered.  He  may  have  large  revenues  from 
some  sources ;  but  he  may  be  losing  money  in  other  enter- 
prises, and  it  is  only  after  striking  a  balance  that  we  can 
be  said  to  know  what  his  income  really  is.  If  an  English- 
man has  no  revenue  except  from  land,  and  is  engaged  in 
no  business,  the  tax  on  rents  is  a  tax  on  his  income.  The 
same  would  be  true  in  the  case  of  interest  and  salaries ;  but 
it  ceases  to  be  true  whenever  the  fluctuating  element  of 
profit  and  loss  is  introduced. 


INCOME  TAXES  155 

These  distinctions  are  substantially  recognized  in  the 
English  law.  In  view  of  the  inequality  of  sacrifice  caused 
by  taxing  incomes  without  regard  to  their  permanency, 
or  to  the  differences  in  the  amounts  of  the  necessary  ex- 
penses of  the  recipients,  that  law  provides  that  incomes 
less  than  £160  shall  not  be  taxed,  and  that  incomes  less 
than  £700  shall  be  allowed  a  partial  exemption.  There 
are  five  divisions  or  schedules  under  which  income  is 
assessed.  Schedule  A  applies  to  income  drawn  from  the 
ownership  of  dwelling  houses  and  agricultural  land,  the 
tax  being  deducted  from  the  rent  by  the  tenant,  if  any,  and 
paid  by  him  to  the  tax  gatherer.  The  landlord,  therefore, 
has  no  control  over  this  payment.  Schedule  C  covers  in- 
come from  government  securities  payable  in  England.  The 
tax  is  to  be  deducted,  in  most  cases  at  least,  from  the 
income  before  it  is  paid  to  the  owner  of  the  securities. 
Schedule  E  relates  to  salaries  and  pensions  paid  by  gov- 
ernment or  other  corporations,  the  tax  on  which  is  de- 
ducted before  payment.  Schedule  B  applies  to  the  profits 
of  farmers,  their  profits  being  arbitrarily  assumed  to  be 
a  certain  proportion  of  their  rent.  In  this  case  the  farmer 
pays  his  own  tax,  but  it  is  not  properly  an  income  tax, 
since  he  may  not  even  make  the  rent  out  of  the  farm. 

It  is  only  under  Schedule  D  that  an  income  tax,  strictly 
defined,  is  levied;  and  much  of  the  taxation  even  under 
this  schedule  is  not  of  this  description.  The  railways  and 
other  corporations  are  taxed  under  this  schedule  on  their 
earnings,  and  they  therefore  deduct  the  tax  from  the  divi- 
dends payable  to  their  stockholders,  without  consultation 
with  the  latter.  It  is  only  the  income  derived  from  trades, 
from  professions,  and  from  loans  and  miscellaneous  invest- 
ments, that  is,  strictly  speaking,  subject  to  income  tax  in 


156  THE  METHODS  OF  TAXATION 

England.  All  other  revenue,  practically,  is  taxed  before 
it  reaches  the  owner,  and  is  generally  discoverable  by  the 
method  of  inspection.1  The  true  profits,  or  actual  net 
income,  of  any  one  engaged  in  business  for  himself,  or 
managing  his  own  property,  can  be  known  only  to  himself, 
and  the  assessor  must  in  the  main  accept  his  figures.  To 
put  the  matter  in  few  words,  other  people  may  report  to 
the  assessor  whatever  sums  they  pay  over  to  any  person, 
and  withhold  a  tax  on  such  payments  under  the  name  of  a 
tax  on  his  income ;  but  it  is  only  that  person  himself  who 
knows  what  all  these  payments  amount  to,  or  how  far  they 
are  offset  by  losses,  and  it  is,  therefore,  only  he  that  can 
determine  the  true  amount  of  his  taxable  income.  Hence 
the  English  law  requires  from  every  person  having  an 
income  of  £160  a  disclosure,  or  declaration,  of  the  state  of 
his  affairs.  It  very  wisely  does  not  require  this  statement 
to  be  sworn  to;  nor  is  the  penalty  for  making  a  false  one, 
or  for  not  making  one  at  all,  very  severe.  On  the  other 
hand,  the  revenue  officers  are  sworn  not  to  disclose  the  in- 
formation contained  in  these  statements. 

The  recognition  of  the  distinctions  above  referred  to 
appears  in  the  provisions  for  determining  exemptions  and 
abatements.  The  government,  as  we  have  seen,  imposes 
a  tax  on  revenue  from  certain  sources  before  it  reaches  the 
owner,  and  without  reference  to  the  amount  of  his  income. 
But  it  also  provides  that  incomes  below  specified  figures 

1  It  is  computed  that  from  three-fourths  to  four-fifths  of  the  tax  is 
collected  before  tha  income  reaches  the  owner.  The  Commissioners  esti- 
mate that  of  the  gross  income  in  1901-02,  under  Schedule  D,  Public 
Companies,  Local  Authorities,  and  Banks  paid  on  £270,000,000,  leaving 
for  self-assessment  by  persons  and  firms  £218,000,000.  As  some  of  this 
can  be  verified,  the  amount  self-assessed  and  therefore  subject  to  eva- 
sion is  about  £150,000,000.  As  to  this,  "grossly  insufficient  returns,  or 
no  returns  at  all,  are  made  over  long  periods  of  years  with  impunity." 


INCOME  TAXES  157 

shall  not  be  taxed,  or  be  taxed  at  a  lower  rate  than  that 
imposed  on  larger  incomes.  Hence,  in  order  to  obtain  the 
exemption  to  which  he  is  entitled  by  law,  but  of  which 
the  law  has  deprived  him,  the  owner  must  resort  to  pro- 
ceedings against  the  government.  He  may  have  made  a 
return  of  his  income,  under  Schedule  D,  but  he  must  make 
another  return  in  order  to  recover  income  intercepted  be- 
fore it  reached  him,  and  this  return  must  state  the  amount 
of  tax  deducted  from  every  item  of  revenue.  These  pro- 
ceedings are  so  complicated  as  to  be  beyond  the  compre- 
hension of  many  persons,  and  the  aid  of  lawyers,  or  those 
familiar  with  the  practice,  must  be  secured.1  In  numerous 
cases  the  expense  of  obtaining  redress  more  than  balances 
the  amount  of  the  possible  recovery,  and  the  government 
thus  derives  a  considerable  revenue  from  those  whom  it 

1  The  forms  sent  out  by  the  Inland  Revenue  Commissioners  are  ad- 
mitted to  be  perplexing.  In  criticising  them,  one  of  the  Committee  on 
the  income  tax  made  use  of  the  following  expressions:  "I  confess  for 
my  part  that  the  ordinary  form  which  an  income  taxpayer  has  to  fill  up 
is  most  confusing ;  it  puzzles  me  often.  .  .  .  Number  3  seems  to  be  ex- 
pressed in  very  legal  phraseology  which  may  be  quite  incomprehensi- 
ble to  an  ordinary  man.  ...  So  smothered  in  verbiage  that  it  is 
difficult  for  an  ordinary  taxpayer  to  understand.  .  .  .  Many  persons 
have  been  paying  income  tax  without  being  really  liable." 

Persons  in  trade  were,  before  1907,  assessed  on  their  average  income 
for  three  preceding  years.  The  labor  involved  in  ascertaining  this  av- 
erage is  necessarily  very  great,  and  small  tradesmen  are  often  not  capa- 
ble of  the  necessary  bookkeeping.  It  is  the  opinion  of  many  of  the  ex- 
perts in  the  Commissioners'  office  that  the  "average"  is  seldom  brought 
into  play  to  swell  the  profits  of  the  years  preceding  the  assessment, 
though  it  is  brought  into  play  to  cut  those  profits  down.  The  Com- 
missioners' solicitor  pronounces  this  an  understatement.  It  may  be 
added  that  in  order  to  obtain  a  reduction,  the  taxpayer  must  send  to  the 
revenue  officers  all  his  receipts  showing  the  payment  of  dividends,  rents, 
etc.,  which  have  to  be  examined  at  the  London  office  or  verified  by  the 
surveyor.  The  amount  of  clerical  labor  involved  in  such  proceedings 
is  only  imperfectly  suggested  by  the  circumstance  that  the  number  of 
claims  for  repayment  is  about  450,000  every  year,  while  the  number  of 
abatements  is  nearly  700,000. 


158  THE  METHODS  OF  TAXATION 

professes  to  exempt,  but  whose  income  it  has,  contrary  to 
its  professions,  subjected  to  taxation.  It  thus  inflicts  an 
injustice  of  the  same  nature  as  that  arising  under  the 
assessment  of  personal  property  in  the  City  of  New  York. 

It  is  of  course  impracticable  to  determine  the  pecuniary 
loss  to  taxpayers  through  overpayments,  and  because  of 
the  expense  of  the  proceedings  to  correct  their  assessments 
and  to  obtain  the  restitution  of  money  of  which  the  tax- 
gatherers  have  deprived  them.  Some  evidence,  however, 
may  be  gathered  from  the  existence  of  concerns  formed 
for  the  purpose  of  procuring  such  redress.  Nearly  one 
hundred  such  agencies  are  registered  at  the  Inland  Reve- 
nue department,  and  their  usual  charge  is  one-third,  or 
one-half,  the  amount  recovered.  The  business  of  these 
agencies,  however,  is  almost  entirely  derived  from  claim- 
ants residing  abroad.  There  were  formerly  very  few  such 
claimants.  In  1887  the  number  had  risen  to  one  thou- 
sand, and  in  1903  to  twenty  thousand.  The  enormous 
increase  of  the  tax  no  doubt  had  drawn  the  attention  of 
the  taxpayers  to  the  importance  of  asserting  their  rights, 
and  the  advertisements  of  the  agencies  had  doubtless  had 
an  effect.  Probably  the  expense  to  residents,  who  gen- 
erally employ  their  own  solicitors,  may  have  been  less  in 
proportion  than  that  incurred  by  nonresidents,  but  it 
must  be  in  the  aggregate  very  large.  Persons  of  intelli- 
gence and  leisure,  and  concerns  having  competent  book- 
keepers, may  dispense  with  legal  aid;  but  large  concerns 
frequently  employ  actuaries  —  a  class  of  persons  not  much 
less  expensive  than  lawyers  —  to  attend  to  their  assess- 
ments and  maintain  their  rights. 

There  are  manuals  published,  professedly  intended  to 
aid  taxpayers  in  obtaining  justice;  but  the  mental  ap- 


INCOME  TAXES  159 

plication  required  to  comprehend  these  manuals  is  for 
most  persons  too  severe.  Without  putting  a  pecuniary 
value  on  the  enormous  aggregate  of  vexation  and  wasted 
time  involved  in  the  proceedings,  it  is  perhaps  a  not 
unreasonable  guess  —  for  we  can  only  guess  —  that  the 
total  cost  to  taxpayers  of  obtaining,  or  of  failing  to  obtain, 
the  repayments  to  which  they  are  legally  entitled,  is  not 
less  than  half  the  amount  recovered.  This  amount  has 
in  recent  years  risen  to  some  £2,700,000,  the  number  of 
repayments  being  nearly  four  hundred  and  seventy-five 
thousand. 

It  is  supposed  that  the  great  majority  of  taxpayers  are 
entitled  to  exemption,  but  many  of  them  are  ignorant  of 
their  rights,  and  would  be  unable  to  enforce  them,  even 
if  they  knew  what  they  were.  Small  tradesmen  often  do 
not  attempt  to  make  returns,  probably  because  their  ac- 
counts are  so  imperfect  as  to  render  it  hard  for  them  to 
tell  what  their  income  really  is.  In  such  cases  the  as- 
sessors usually  "  doom  "  the  taxpayer,  who  submits  to  the 
assessment  unless  it  is  too  oppressive.  It  seems  that  about 
one-fifth  of  those  assessed  under  Schedule  D  are  "doomed." 
While  poor  men  may  submit  to  this  because  they  cannot 
help  themselves,  it  is  obvious  that  many  rich  men,  as  in 
this  country,  may  prefer  the  chance  of  having  the  assessor 
underestimate  their  resources  to  the  certainty  of  having 
to  pay  taxes  on  all  the  wealth  that  they  disclose;  and  the 
English  commissioners  complain  of  the  extent  of  this 
practice.1 

1  Sir  W.  Harcourt  said,  in  his  budget  speech,  in  1894:  "Many  people 
are  in  a  happy  ignorance  of  the  Income  Tax  which  they  pay.  I  wish 
there  were  more  of  them.  Even  in  the  case  of  trades  and  professions 
where  you  require  a  declaration  of  a  man's  profits  you  do  not  attempt 
an  investigation  of  the  income  the  individual  derives  from  other  sources. 


160  THE  METHODS  OF  TAXATION 

What  might  be  called  the  reductio  ad  dbsurdum  of  the 
principle  of  exemption  occurs  in  the  case  of  the  coopera- 
tive trading  societies.  These  societies,  like  other  concerns 
engaged  in  selling  goods,  make  profits  on  the  capital  em- 
ployed; but  these  profits  are  distributed  among  their 
members  as  "  bonuses,"  or  by  means  of  reduced  prices. 
They  are  exempt  from  income  tax,  to  the  extreme  dis- 
pleasure of  all  the  tradesmen  who  carry  on  their  business 
in  the  usual  manner.  It  seems  clear  that  whether  capital 
is  employed  in  the  one  way  or  in  the  other,  a  profit  is 
made ;  it  is  the  same  thing  when  a  man  gets  his  groceries 
at  a  discount  as  when  he  receives  a  dividend  in  cash. 
Furthermore,  many  of  these  societies  sell  goods  at  current 
prices  to  non-members,  whereby  the  profits  of  members 
are  enlarged.  Even  when  this  practice  does  not  prevail, 
it  is  hard  to  see  why  the  members  of  these  societies  are 
not  really  partners  in  a  joint  stock  enterprise  carried  on 
for  profit,  and  therefore  as  properly  liable  to  income  tax 
as  persons  receiving  an  income  from  other  investments. 
Their  exemption  is  defended  on  the  ground  that  they  are 
with  few  exceptions  men  of  very  small  means,  whose  in- 
comes would  be  below  the  taxable  limit.  If  any  part  of 
such  income  were  intercepted  it  would  have  to  be  re- 
turned ;  a  proceeding  which  on  account  of  the  large  num- 
ber of  the  members  of  these  societies  —  probably  more 
than  two  millions  —  would  cause  an  immense  deal  of 
trouble  and  expense.  This  is  true;  but  it  is  not  true  of 

I  have  made  a  careful  investigation  of  this  matter  in  consultation  with 
the  authorities  of  the  Inland  Revenue,  and  they  are  strongly  of  opinion 
that  the  measures  of  penal  discovery  and  irritating  inquisition  which 
would  be  involved  in  any  plan  which  required  the  determination  of 
every  man's  income  from  all  sources  would  render  the  collection  of  the 
Income  Tax  so  odious  as  to  imperil  its  existence,  and  in  all  probability 
make  it  impossible  to  maintain  the  tax." 


INCOME  TAXES  161 

the  cooperative  societies  alone.  The  difficulty  admitted 
here  to  exist  is  not  peculiar  to  this  case;  it  necessarily 
arises  if  the  principle  of  intercepting  income  and  then 
repaying  it  is  adopted  at  all. 

What  is  known  as  the  income  tax  in  England  thus  ap- 
pears to  consist  in  part  of  an  income  tax  proper,  but 
chiefly  of  taxes  on  rents,  on  the  earnings  of  corporations, 
on  most  forms  of  credit  involving  the  payment  of  divi- 
dends or  interest,  and  on  disbursements  for  salaries  and 
pensions.  It  is  obvious  that  these  taxes  are  assessed  with 
very  unequal  degrees  of  certainty.  The  tax  on  consols,  or 
the  funded  debt  of  England,  is  determinable  with  as  much 
accuracy  as  the  interest  payable  thereon.  The  tax  on  pen- 
sions is  equally  certain,  and  so  is  the  tax  on  the  salaries 
of  public  officers,  and  on  those  of  officers  of  public  com- 
panies. The  tax  on  the 'earnings  of  such  companies,  owing 
to  the  necessary  publicity  of  their  accounts,  is  probably 
assessed  with  a  high  degree  of  certainty.  The  tax  on  rents, 
the  contract  of  leasing  being  generally  written  and  in  the 
possession  of  both  parties,  is  also  assessed  with  much 
certainty ;  and  occupying  owners  may  be  assessed  by  anal- 
ogy. The  tax  on  colonial  and  foreign  loans,  payable 
through  agents  in  England,  is  precisely  determinable.  The 
tax  on  foreign  investments  and  on  miscellaneous  credits 
is  very  uncertain  in  its  assessment,  as  it  depends  largely 
on  disclosures  by  interested  parties.  The  tax  on  profits  is 
of  course  even  more  unequal.1 

1  The  official  returns  of  the  Commissioners  of  Inland  Revenue  give 
some  idea  of  the  degree  of  inequality  which  prevails.  The  inequality 
due  to  allowances  for  abatements  and  deductions  may  be  first  examined. 
The  annual  value  of  lands  in  the  year  1895  was  55.4  millions  of  pounds, 
as  compared  with  67  millions  twenty  years  before.  The  annual  value 
of  houses  was  154.5  millions  in  1895,  and  about  97  millions  in 
1875.  The  sum  of  these  values  in  1876  was  174.2,  with  decluc- 

11 


162  THE  METHODS  OF  TAXATION 

The  inequality  arising  from  the  failure  to  assess  all 
income  from  foreign  investments  has  been  specifically  rec- 
ognized by  a  statute  passed  in  1885,  which  declares  that 
previous  laws  had  been  found  "  inadequate  to  secure  the 
charging  and  payment  of  income  tax  upon  dividends  pay- 
able out  of  the  revenues  of  foreign  and  colonial  states  and 
dividends  of  foreign  and  colonial  companies."  As  the 
law  now  stands  all  persons  entrusted  with  the  payment 
of  returns  from  any  foreign  investments  are  commanded, 
under  penalty  of  a  fine  of  £100  for  any  failure,  to  de- 
liver to  the  Board  of  Inland  Revenue  a  complete  account 
of  such  payments.  Any  one  acting  as  a  banker  who  shall 
sell  or  otherwise  realize  coupons,  or  warrants,  or  bills  of 
exchange  for  dividends,  and  pay  over  the  proceeds  to  any 
person,  or  credit  him  therewith,  is  within  the  statute.  So 
is  any  person  who  by  like  means  obtains  payment  of  divi- 
dends for  another  without  the  Kingdom.  A  dealer  in 
coupons  who  buys  from  any  person  not  a  banker  or  a 
dealer  is  also  covered  by  the  statute.  A  pecuniary  re- 


tions  amounting  to  13.1,  leaving  a  net  assessment  of  161.1  million 
pounds.  In  1895  the  gross  assessment  was  210.6  millions,  the  number 
of  separate  properties  assessed  being  9,248,000,  but  the  deductions  were 
50.9  millions,  leaving  a  net  assessment  of  159.7  millions;  which  signifies 
that  taxable  income  from  this  source  has  decreased  in  the  course  of 
twenty  years,  and  that  decrease  has  since  continued.  The  profits  of 
farmers  should  have  decreased  in  the  same  proportion  as  the  annual 
value  of  lands;  but  owing  to  increased  deductions  and  lower  prices  for 
their  products,  the  decline  is  greater. 

In  1870  salaries  and  pensions  amounted  to  29.9  millions,  with  de- 
ductions of  2.2  millions.  In  1895  they  amounted  to  51  millions, 
but  the  deductions  were  16.7.  The  salaries  doubled,  but  the  taxable 
income  from  this  source  increased  only  one-half.  In  1905  the  number 
of  salaries  assessed  under  Schedule  E  was  about  370,000,  the  amount 
being  about  88  millions.  To  this  must  be  added  about  100,000  salaries 
assessed  under  Schedule  D,  amounting  to  about  23  millions,  the 
deductions  being  over  36  millions. 


INCOME  TAXES  163 

numeration  is  allowed  to  bankers  and  others  complying 
with  the  statute,  the  allowance  not  being  less  than  three- 
pence in  the  pound  of  the  amount  of  tax  collected.  Before 
this  statute  was  passed  there  seems  to  have  been  no  tax 
collected  from  income  in  the  shape  of  coupons,  but  in 
1886  income  from  this  source  amounting  to  5.8  millions 
of  pounds  was  disclosed,  and  it  has  since  risen  to  over 
10.7  millions.  It  would  seem,  therefore,  that  before  this 
statute  was  passed,  some  of  the  recipients  of  income  of 
this  description  may  have  failed  to  disclose  its  existence; 
although  doubtless  much  of  it  was  returned  as  profit.1 

Had  it  not  been  for  the  increased  assessment  under  the 
statute  of  1885,  the  income  from  English  investments  in 
foreign  countries  assessed  under  Schedule  D  would  have 
risen  only  from  13.7  to  22.5  millions,  between  1884  and 
1895 ;  and  it  amounted  in  the  latter  year  to  less  than 
30  million  pounds.  To  this  may  be  added  income  from 
loans  to  foreign  and  colonial  governments  and  from  Indian 
railways,  assessed  at  about  24  million  pounds,  making  a 
total  of  54  millions.  But  in  1882  a  very  high  authority, 
Mr.  Robert  Giffen,  computed  the  income  from  foreign 
investments  at  75  millions.  The  assessment  was  then  30 
millions.  Mr.  Giffen  made  another  computation  in  1885, 
according  to  which  the  foreign  revenue  was  then  85  mil- 
lions. In  1895  it  is  highly  probable  that  it  was  much  more 

1  Judging  from  the  aversion  of  the  English  taxpayers  to  the  income 
tax,  it  seems  probable  that  much  evasion  would  take  place  under  this 
head  if  it  were  practicable.  That  it  is  practicable  is  admitted  by  the 
Secretary  of  the  Board  of  Inland  Revenue.  He  testifies :  "If  a  person 
receives  an  open  cheque  or  draft  payable  through  a  banker  upon 
which  there  is  no  visible  evidence  that  it  is  in  payment  of  a  dividend, 
we  cannot  put  the  banker  into  the  position  to  determine  and  decide 
whether  it  is  income  or  not.  In  such  cases  we  are  dependent  entirely 
on  the  return  made  by  the  recipient." 


164  THE  METHODS  OF  TAXATION 

than  100  millions,  and  perhaps  twice  as  much  as  its  as- 
sessed value. 

If  we  compare  the  returns  under  Schedule  D,  we  observe 
that  the  increase  in  the  income  from  trades  and  profes- 
sions, which  is  ascertained  by  the  method  of  disclosure, 
is  very  small,  while  the  increase  of  income  from  public 
companies,  whose  accounts  are  open  to  inspection,  is  very 
large.  In  1870  the  income  from  trades  and  professions 
was  assessed  at  131.8  millions,  subject  to  deductions 
amounting  to  12.9  millions,  or  a  net  assessment  of  118.9 
millions.  In  1895,  the  gross  assessment  was  170.3,  the 
deductions  49.3,  and  the  net  assessment  121  million 
pounds,  a  gain  of  about  two  millions  in  twenty-five  years. 
But  some  uncertainty  affects  the  item  of  deductions,  owing 
to  changes  in  the  law,  and  other  causes.  The  gross  as- 
sessment of  public  companies,  etc.,  however,  rose  from 
97.2  millions  in  1885  to  151  millions  in  1895,  a  gain  of 
nearly  54  millions  in  ten  years.  This  was  from  domestic 
sources  only;  including  foreign  sources  the  amounts 
would  be  111  millions,  and  177  millions.  In  1900  the 
increase  in  the  income  of  trades  and  professions  during 
the  previous  decade  was  found  to  be  about  one-tenth  of 
the  increase  in  the  income  of  public  companies.  In 
1903-04,  this  income,  taking  the  gross  figures,  had  come 
to  exceed  that  of  trades  and  professions  by  one-sixth. 
But  the  deductions  had  become  so  large  as  to  make  it 
probable  that  the  net  income  from  trades  and  professions 
had  actually  decreased.  Doubtless  the  incorporation  of 
many  firms  accounts  to  a  considerable  extent  for  this 
phenomenon;  but  it  tends  to  confirm  the  charge  that  eva- 
sion is  extensively  practiced  where  it  is  practicable.  Al- 
though such  evasion  is  complained  of  by  the  Board  of 


INCOME  TAXES  165 

Inland  Revenue,  the  commissioners  charged  with  the  as- 
sessment of  this  tax  belong  to  the  propertied  class,  and 
the  active  officers  are  superior  to  the  ordinary  functionary 
of  this  kind  elsewhere,  so  that  collusive  underassessment 
is  not  believed  to  prevail. 

While  the  evidence  points  strongly  to  the  conclusion 
that,  under  the  English  system  as  well  as  in  this  country, 
gross  injustice  is  caused  by  imposing  taxes  on  property 
at  valuations  ascertained  by  the  method  of  disclosure,  it 
may  seem  not  altogether  convincing.  It  happens,  how- 
ever, that  revelations  have  been  made  which  put  the  matter 
beyond  question,  the  evidence  having  been  furnished  by 
the  highest  authority.  In  his  budget  speech  in  1853 
Mr.  Gladstone  said: 

"  I  will  state  what  happened  in  a  great  town  where  a  new 
street  was  to  be  built.  The  persons  who  lived  and  carried  on 
business  in  the  old  street,  which  was  pulled  down  to  make  way 
for  the  new  one,  had  been  charged  at  a  certain  amount  to  the 
income  tax.  They  had  also,  of  course,  made  returns  at  a  cer- 
tain amount  under  the  income  tax.  When  the  new  street  came 
to  be  built,  they  claimed  compensation  for  the  loss  of  their 
business.  Twenty-eight  persons  in  all  claimed  the  sum  of 
£48,159  as  compensation  for  their  profits  for  a  single  year. 
But  what  was  the  amount  at  which  they  had  returned  their 
profits  for  assessment  to  the  income  tax?  They  claimed 
£48,000;  they  got  from  the  jury  nearly  £27,000;  but  the 
return  of  profits  for  assessment  to  the  income  tax  which  they 
separately  made  had  amounted  only  to  £9,000.  Frauds  of  this 
kind,  and  in  many  other  cases,  do  exist;  they  are  inseparable 
from  the  character  of  the  impost,  human  nature  remaining  as 
it  is." 

In  their  valuable  report  rendered  in  1870,  the  Commis- 
sioners state  that  they  have  often  called  attention  to  the 


166  THE  METHODS  OF  TAXATION 

large  evasions  practiced  under  Schedule  D  by  means  of 
fraudulent  returns,  and  continue :  "  It  was  not,  however, 
until  recently  that  we  were  enabled  to  form  a  reliable 
estimate  of  the  loss  which  the  revenue  sustains  in  this 
way.  An  extensive  demolition  of  houses  by  the  Metro- 
politan Board  of  Works  gave  rise  to  a  great  number  of 
claims  to  compensation.  Two  hundred  of  these  were  ex- 
amined by  our  officers,  and  in  eighty  cases  surcharges  were 
made  and  sustained  on  appeal — that  is  to  say,  in  40  per 
cent  of  the  cases  inquired  into,  the  revenue  had  been  de- 
frauded of  its  dues.  The  aggregate  of  the  taxable  incomes 
returned  by  the  parties  themselves  was  £73,642,  and  the 
amount  ultimately  found  to  be  correct  was  £171,370,  being 
in  excess  of  the  returns  by  £97,728,  or  about  130  per 
cent." 

The  commissioners  further  explained  that  this  was  not 
an  exceptional  case.  "  As  an  invariable  consequence  of 
claims  for  compensation,  where  the  actual  profits  of  trades 
or  professions  are  divulged,  we  find  the  income  tax  re- 
turns largely  deficient.  And,  moreover,  this  is  not  con- 
fined to  any  particular  class,  trade,  or  profession;  we 
find  the  same  practice  prevailing  among  legal  practitioners, 
when  on  the  abolition  of  their  exclusive  privileges  in  some 
particular  Court  they  have  to  make  good  their  claims  to 
your  Lordships;  we  find  it  on  all  occasions  of  large  de- 
molition of  shops  and  warehouses  for  public  purposes, 
in  every  variety  of  trade,  and  we  find  it  in  great  public 
companies  and  in  firms  whose  business  is  almost  a  national 
concern,  from  its  magnitude  and  world- wide  reputation; 
we  therefore  think  that  we  may  venture  to  generalize  upon 
the  facts  which  the  most  recent  occasion  of  compensation 
cases  has  furnished."  The  conclusion  reached  was  that 


INCOME  TAXES  167 

130  per  cent  was  rather  an  understatement  of  the  extent 
to  which  the  returns  ought  to  be  increased. 

This  statement  indicates  that  about  40  per  cent  of  those 
who  paid  income  tax  returned  their  income  at  little  more 
than  one-third  of  its  amount.  Supposing  the  income  of 
the  other  60  per  cent  of  the  taxpayers  to  have  been  re- 
turned at  its  full  value,  they  would  have  paid  at  nearly 
three  times  the  rate  paid  by  the  others.  In  view  of  the 
moderate  rate  of  the  tax  at  the  period  in  question  — 
amounting  only  to  about  one-fiftieth  of  the  income  —  the 
aversion  to  the  tax  on  the  part  of  the  English  tradesmen 
appears  to  Americans  of  the  present  generation  rather 
extreme.  The  property  tax  here  frequently  amounts  to 
more  than  a  fiftieth  of  the  gross  value,  and  is  perhaps 
generally  equivalent  to  an  income  tax  of  one-tenth  to 
one-fifth.  With  all  income  tax  in  1902  of  fifteen  pence 
in  the  pound,  or  more  than  three  times  what  it  was  in 
1870,  it  has  seemed  probable  that  the  discrepancy  then 
existing  was  materially,  if  not  correspondingly,  increased. 
In  fact  the  complaints  became  so  serious  as  to  lead  in 
1904  to  investigation  by  a  Parliamentary  committee.  The 
proceedings  of  this  committee  were  not  all  public,  but  the 
testimony  taken  seems  to  sustain  the  complaints.  It  was 
perhaps  thought  unwise  to  explain  to  the  taxpayers,  as 
was  done  in  1870,  the  methods  by  which  evasion  is  prac- 
ticed, or  to  dwell  upon  the  injustice  of  a  tax  which  dis- 
criminates in  favor  of  the  less  scrupulous  trader.  The 
report  of  the  committee,  however,  shows  great  reluctance 
to  resort  to  more  inquisitorial  methods  than  are  now  em- 
ployed, and  the  changes  that  they  have  to  suggest  are  not 
of  a  nature  to  remove  the  fundamental  objections  to  the 
method  of  self -assessment,  or  disclosure.  What  the  report 


168  THE  METHODS  OF  TAXATION 

especially  illustrates  is  the  enormous  loss  by  friction  caused 
by  the  practice  of  collecting  taxes  from  those  who  are  not 
taxable,  and  then  undoing  this  complicated  proceeding. 
The  cost  of  collecting  taxes  will  be  considered  later;  but 
a  few  words  on  the  situation  in  England  may  be  here 
introduced.1 

1  Sir  Charles  Dilke,  the  chairman,  speaks  of  "the  formidable  evi- 
dence enforcing  the  necessity  for  universal  declarations  which  came 
before  this  committee,  and  was  not  allowed  to  be  published."  The 
evidence  was  suppressed  because  it  seemed  "to  involve  the  possible 
use  of  names  which  it  might  be  undesirable  to  give  in  public,  or  of  sys- 
tems of  evasion  which  it  might  be  wise  not  to  call  too  much  attention 
to."  It  appeared  that  "enormous  evasions  of  the  income  tax"  took 
place,  that  "an  enormous  amount  of  property  escaped,"  etc.  In  con- 
sequence of  this  report,  the  law  was  altered  in  1907,  so  that  every  one 
who  receives  a  notice  from  the  Inland  Revenue  Board  —  600,000  are 
sent  out  —  must  make  a  return  of  his  income,  even  if  it  is  nil,  under 
penalty  of  a  fine.  This  will  subject  perhaps  200,000  people  to  vexation, 
because  some  of  their  number  have  been  negligent  or  dishonest.  The 
penalties  for  making  incorrect  returns  have  been  increased,  and  the 
period  during  which  the  government  can  recover  extended.  All  em- 
ployers must  give  the  names  and  salaries  of  their  employees.  The 
abatement  allowed  at  the  end  of  a  year  when  the  profits  fell  below  the 
average  of  the  three  years  preceding  is  to  be  done  away  with.  The 
abatement  of  3d.  on  earned  incomes  is  to  be  granted  only  to  those  who 
make  out  a  full  statement  of  all  their  income;  it  being  thought  that 
many  persons  who  do  not  now  make  returns  would  be  led  to  do  so  for 
the  sake  of  the  abatement.  The  evidence  taken  by  the  committee 
proves  that  the  high  tax  of  recent  years  has  not  only  produced  a  very 
large  number  of  claims  for  repayment  from  nonresidents,  but  has  also 
caused  an  enormous  increase  in  all  sorts  of  claims.  "People  who  con- 
sidered it  hardly  worth  their  while  to  trouble  about  making  claims 
when  the  tax  was  at  Sd.  did  think  it  worth  while  when  the  tax  was  Is." 
It  is  to  be  observed  that  when  a  marriage  takes  place,  the  incomes  of 
the  husband  and  wife  (with  some  allowance  for  the  separate  earnings 
of  the  wife)  are  added  for  purposes  of  taxation.  Both  may  have  en- 
joyed exemptions  or  abatements  before  their  union,  which  they  now 
lose.  It  is  obvious  that  this  constitutes  a  discouragement  to  legitimate 
sexual  connections  which  may  have  evil  effects  on  the  institution  of  the 
family.  The  changes  in  the  income  tax  have  been  as  follows :  From 
1842,  when  the  tax  was  reimposed,  to  1852,  all  incomes  over  £150  were 
charged  at  Id.  in  the  pound  without  any  abatement.  From  1853  to 
1802,  incomes  over  £100  were  charged,  but  at  a  less  rate  than  those 


INCOME  TAXES  169 

Reckoning  as  naught  the  aggregate  of  vexation  and  waste 
of  time,  it  seems  doubtful  if  the  various  abatements  and 
exemptions  allowed  constitute  a  material  gain  to  the  com- 
munity. The  expenses  of  the  Board  of  Inland  Revenue, 
although  the  commissioners  for  assessing  the  tax  serve 
without  pay,  are  perhaps  not  far  from  eight  per  cent  of 
the  amount  of  income  tax  collected.  The  number  of  abate- 
ments of  £150  allowed  because  the  income  is  between 
£160  and  £400  is  now  over  600,000,  and  their  amount 
nearly  £100,000,000.  The  number  of  incomes  in  this  class 
is  more  than  four-fifths  of  the  whole  number,  and  their 
amount  is  seven-twelfths  of  the  whole  assessment  to  per- 
sons. Taking  everything  into  account,  it  is  far  from  im- 
probable that  the  total  burden  imposed  by  this  complicated 
system,  by  which  the  government  takes  more  than  its  due 
from  its  subjects,  and  returns  a  part  of  it  to  them,  after 
long  delay,  when  compelled  to  do  so  by  the  employment 
of  a  cumbersome  and  perplexing  procedure,  more  than 
counterbalances  the  relief  afforded  by  the  partial  exemp- 
tion of  small  incomes.  Public  companies,  etc.,  having 
incomes  of  more  than  £5,000  number  5,500  and  are  one- 
fourth  of  the  whole  number.  They  have  incomes  amount- 
ing to  some  £231,000,000,  or  more  than  nine-tenths  of 
the  income  of  this  class.  The  number  of  firms  having  in- 
over  £150.  From  1863  to  1871  an  abatement  of  £60  was  allowed  on 
all  incomes  between  £100  and  £200.  From  1872  to  1875  the  abatement 
was  £80,  allowed  on  incomes  up  to  £300.  From  1876  to  1893  incomes 
below  £150  were  exempted,  and  the  abatement  was  £120  on  incomes 
below  £400.  From  1894  to  1897  incomes  below  £160  were  exempt, 
incomes  below  £400  were  allowed  an  abatement  of  £160,  and  incomes 
below  £500  an  abatement  of  £100.  Some  abatement  was  also  allowed 
for  the  separate  earnings  of  wives.  In  1898  incomes  between  £400  and 
£500  had  an  abatement  of  £150,  between  £500  and  £600  an  abatement 
of  £120,  and  between  £600  and  £700  an  abatement  of  £70.  In  1907 
an  abatement  of  3d.  was  allowed  to  "earned  "  incomes  under  £2,000. 


170  THE  METHODS  OF  TAXATION 

comes  over  £1,000  is  about  15,500,  or  more  than  one- 
third  of  the  whole  number,  with  income  amounting  to  five 
times  that  of  the  small  firms.  Were  the  whole  machinery 
employed  in  the  assessment  and  collection  of  the  income 
tax  swept  away,  excepting  what  was  needed  for  collecting 
the  tax  from  large  firms  and  corporations,  the  saving 
would  very  soon,  it  seems  possible,  make  up  for  the  tem- 
porary, and  largely  nominal,  increase  in  the  burdens  of 
those  interested  in  these  firms  and  corporations. 

The  evidence  offered  by  the  Board  of  Inland  Revenue, 
and  abundantly  corroborated  by  private  persons,  together 
with  our  experience  of  the  evils  of  the  method  of  dis- 
closure in  this  country,  seems  to  make  it  unnecessary  to 
present  anything  further  in  order  to  sustain  Mill's  con- 
clusion that  the  income  tax,  on  whatever  principles  of 
equality  it  may  be  imposed,  is  in  practice  unequal  in  one 
of  the  worst  ways.  In  this  conclusion  Mr.  Gladstone 
concurred,  and  he  came  near  to  extinguishing  the  tax; 
but  the  Crimean  War,  in  the  first  place,  and  his  failure 
to  carry  the  country,  at  the  election  in  1874,  prevented 
him  from  effecting  his  purpose.  As  the  tax  is  apparently 
paid  by  a  small  number  of  rich  people,  it  would  perhaps 
be  idle  to  expect  that  the  mass  of  the  citizens  should  con- 
cern themselves  much  as  to  its  justice,  and  it  will  prob- 
ably remain  a  feature  of  the  English  fiscal  system  for  an 
indefinite  period.  But  unless  human  nature  should  change, 
such  a  tax  must  enable  dishonest,  unscrupulous,  and  astute 
men  to  remove  burdens  from  themselves  and  place  them 
upon  the  helpless  and  the  conscientious.  Those  who  are 
unwilling  to  make  false  statements  are  thus  in  many  cases 
driven  out  of  business;  and  while  at  the  perjuries  of 
taxpayers,  like  those  of  lovers,  Jove  may  laugh,  the  prac- 


INCOME  TAXES  171 

tices  inseparable  from  the  application  of  the  method  of 
disclosure  tend  to  lower  the  tone  of  the  business  world, 
and  to  force  the  direction  of  industrial  affairs  into  the 
hands  of  men  who  have'  little  scruple  at  defrauding  or 
corrupting  those  with  whom  they  deal,  whether  they  be 
private  citizens  or  revenue  officers.  The  extent  to  which 
collusion  with  these  officers  prevails  cannot  be  determined, 
but  we  know  that  it  exists  in  our  country,  and  that  it  must 
always  be  possible  where  the  method  of  discovery  is  em- 
ployed. This  method  seems  to  be  as  incompatible  with 
justice  when  income  is  taxed  as  when  personal  property 
is  assessed,  and  as  it  is  impossible  to  assess  incomes  with- 
out resorting  to  it,  it  follows  that  the  income  tax  cannot 
be  favored  by  those  who  regard  justice  as  an  end  in 
taxation, 


CHAPTER   VI 

TAXES  ON  EXPENSE 

SINCE  the  application  of  the  proportionate  method,  either 
by  means  of  disclosure  or  through  inspection,  seems  neces- 
sarily to  violate  the  recognized  principles  of  justice,  we 
might  conclude  that  the  method  could  not  be  applied  at  all. 
There  is,  however,  a  conceivable  escape  from  this  conclu- 
sion. Even  if  we  cannot  ascertain  the  amount  of  wealth 
owned  by  the  individual  subject,  nor  the  extent  of  hia 
income,  it  may  be  possible  to  discover  these  quantities 
through  some  process  of  inference.  Income  is  received  in 
order  to  be  spent,  for  the  most  part ;  and  it  is  conceivable 
that  this  expenditure  may  be  measured  by  the  sovereign, 
and  that  taxation  levied  upon  it  may  constitute  in  effect  a 
proportionate,  or  even  a  progressive,  income  tax.  In  other 
words,  while  we  cannot  learn  the  amount  of  a  man's  income, 
we  may  learn  the  amount  of  his  outgo,  and,  by  taxing  the 
objects  for  which  he  disburses  his  money,  may  succeed  in 
compelling  him  to  contribute  to  the  support  of  the  govern- 
ment in  proportion  to  the  revenue  that  he  enjoys  under  its 
protection. 

If  we  examine  the  English  revenue  system,  we  observe 
that  it  has  been  deliberately  framed  in  conformity  with 
some  such  theory,  and  that  it  is  intended  to  equalize  the 
sacrifices  of  the  subjects.  Several  causes  have  operated  to 
produce  this  result.  The  insular  position  of  the  British 
Isles  has  made  the  collection  of  duties  on  imported  goods 
much  simpler  and  more  effective  than  elsewhere.  The 


TAXES  ON  EXPENSE  173 

general  government  has  had  far  more  authority  than  that 
of  the  United  States,  compared  with  the  local  governments, 
while  the  territory  covered  is  so  small  as  to  enable  it  to 
act  with  much  greater  efficiency.  What  is  of  a  great  deal 
more  importance,  the  government  has  frequently  been 
directed  by  men  acquainted  with  the  lessons  of  political 
science,  and  disposed  to  regard  them  in  the  laws  which  they 
made  and  in  the  administration  of  those  laws.  There  are 
clear  traces  in  the  English  system  of  the  influence  of  Adam 
Smith  and  J.  S.  Mill;  both  men  of  great  learning  and 
unusual  powers  of  reasoning,  who  were  sincerely  concerned 
in  bettering  the  lot  of  the  weaker  and  humbler  members  of 
human  society  by  relieving  them  from  those  burdens  with 
which  that  society  had  aggravated  the  inequalities  of 
nature.1  They  were  aware,  withal,  that  as  it  was  impos- 

1  Even  in  the  eighteenth  century,  some  features  in  the  system  of 
taxation  in  England  seemed  to  discriminate  in  favor  of  the  poor.  Arthur 
Young,  addressing  a  French  audience  at  the  beginning  of  the  Revolution, 
said:  "We  have  many  taxes  in  England  which  you  know  nothing  of 
in  France,  but  the  Tiers  Etat  —  the  poor  —  do  not  pay  them.  They 
are  laid  on  the  rich.  Every  window  in  a  man's  house  pays,  but  if  he 
has  no  more  than  six  windows  he  pays  nothing.  A  seigneur  with  a 
great  estate  pays  the  vingtiemes  and  tattles,  but  the  little  proprietor  of 
a  garden  pays  nothing.  The  rich  pay  for  their  horses,  their  carriages, 
their  servants,  and  even  for  liberty  to  kill  their  own  partridges;  but 
the  poor  farmer  pays  nothing  of  this;  and,  what  is  more,  we  have  in 
England  a  tax  paid  by  the  rich  for  the  relief  of  the  poor."  PINKERTON'S 
Voyages,  IV,  200.  Tocqueville  declared  that  "for  centuries  the  only 
inequalities  of  taxation  in  England  were  those  which  had  been  succes- 
sively introduced  in  favor  of  the  necessitous  classes.  ...  In  the 
eighteenth  century  it  was  the  poor  who  enjoyed  exemption  from  tax- 
ation in  England,  in  France  it  was  the  rich.  In  the  one  case,  the  aris- 
tocracy had  taken  upon  its  own  shoulders  the  heaviest  public  charges 
in  order  to  be  allowed  to  govern.  In  the  other  case,  it  retained  to  the 
end  an  immunity  from  taxation  in  order  to  console  itself  for  the  loss 
of  government."  L'Ancien  Regime,  146.  These  statements  give  but  a 
partial  view  of  the  situation,  and  it  would  be  easy  to  show  that  the  lot 
of  the  English  poor  was  not  ideal.  But  compare  LECKY,  Democracy 
and  Liberty,  I,  337,  seq. 


174  THE  METHODS  OF  TAXATION 

sible  for  the  officers  of  government  to  know  the  pecuniary 
circumstances  of  every  subject,  no  system  of  taxation  based 
on  the  supposed  possession  of  such  knowledge  could  pos- 
sibly, unless  by  chance,  be  just. 

These  writers,  and  we  may  say  economists  in  general 
before  the  present  generation,  were  much  influenced  by  the 
theory  of  the  division  of  revenue  into  rent,  profit,  and 
wages.  This  seemed  to  point  to  a  tripartite  division  of 
mankind  into  landlords,  capitalists,  and  laborers ;  the  im- 
plication being  that  the  classes  were  mutually  exclusive, 
although  the  incorrectness  of  this  assumption  was  generally 
understood.  Now  the  very  act  of  classification  eliminates 
individual  differences,  and  if  there  are  really  three  eco- 
nomic classes,  the  problem  of  taxation  becomes  enormously 
simplified.  Instead  of  having  to  find  out  the  condition  of 
every  individual  human  being,  the  legislator  needs  only  to 
determine  the  circumstances  of  a  large  class/  every  member 
of  the  class  being  by  hypothesis  in  like  condition  with  every 
other.  With  this  hypothesis  it  became  possible  to  bring 
Political  Economy  to  a  high  degree  of  perfection,  and  much 
of  Eicardo's  reasoning  is  essentially  mathematical.  It  is 
true  that  any  change  in  the  condition  of  one  class  reacts 
on  the  others,  and  the  analysis  of  these  reactions  was  also 
carried  to  great  completeness;  but  the  main  assumption 
was  unaffected. 

Although  Adam  Smith  had  explained  that  wages  de- 
pended partly  on  the  demand  for  laborers,  and  partly  on 
the  cost  of  provisions,  the  researches  of  Malthus  had  the 
effect  of  attracting  attention  to  the  latter  cause,  and  led 
some  economists  to  dwell  on  it  with  rather  exaggerated 
emphasis.  A  popular  impression  was  thus  created  that 
laborers  as  a  class  multiplied  at  such  a  rate  as  to  keep  their 


TAXES  ON  EXPENSE  175 

standard  of  living  so  low  that  they  would  suffer  severe 
privation  if  their  supply  of  provisions  was  reduced.  Ac- 
cording to  this  view,  when  the  cost  of  food  declined,  laborers 
took  advantage  of  the  plenty,  and  increased  in  number  till 
their  increased  consumption  brought  them  back  to  their 
former  level.  The  increased  consumption  of  bread  would 
require  a  greater  acreage  of  wheat,  which  could  be  obtained 
only  by  bringing  less  productive  land  under  cultivation. 
Since  this  land  should  yield  the  ordinary  profit  to  capital, 
the  better  land  would  yield  a  higher  profit,  which  would 
tend  to  be  appropriated  by  the  landlords  in  the  form  of 
higher  rents.  In  so  far  as  these  tendencies  prevailed,  the 
condition  of  laborers  was  fixed,  and  their  standard  of 
living  might  be  not  much  above  that  of  cattle. 

It  is  lamentably  true  that  in  some  parts  of  Europe,  and 
perhaps  in  the  British  Isles,  the  food  of  many  laborers 
was  formerly  little  better  than  that  of  the  beasts  which  they 
tended,  their  shelter  was  hardly  superior,  and  their  cloth- 
ing was  a  poor  substitute  for  the  integuments  provided  by 
nature  for  the  horse  and  the  sheep.  It  was  at  that  time 
obvious  that  human  beings  in  such  poverty  could  pay  little 
in  the  shape  of  taxes;  and  this  inference  continued  to  be 
drawn  after  the  facts  on  which  it  was  based  had  been 
altered.  Any  tax  levied  on  wages  already  at  the  minimum 
needed  for  subsistence  must  either  compel  an  increase  in 
these  wages  —  at  the  expense,  according  to  Adam  Smith, 
of  landlords  and  consumers  of  manufactures,  but  really, 
as  Ricardo  showed,  of  profits  —  or  cause  the  number  of 
laborers  to  decrease  through  starvation.  The  wealthier 
classes  were  therefore  appealed  to  by  the  economists  not 
to  injure  their  own  interests  by  laying  taxes  on  the  neces- 
saries of  life,  and  this  argument  had  much  influence  in  the 


176  THE  METHODS  OF  TAXATION 

struggle  for  the  repeal  of  those  taxes  on  imported  food 
known  as  the  Corn  Laws.  It  was  much  easier  to  convince 
the  capitalists  than  the  landlords,  as  their  interest  in  having 
cheap  food  for  their  workmen  was  direct,  while  the  land- 
lords could  not  understand  why  the  repeal  of  the  corn  laws 
would  not  lower  their  rents;  but  eventually  there  was  a 
substantial  acquiescence  in  the  view  that  taxes  on  food 
were  objectionable  in  their  effects  on  all  classes. 

It  should  be  remembered,  however,  that  Adam  Smith 
had  demonstrated,  with  his  usual  thoroughness,  that  the 
condition  of  laborers  when  he  wrote  had  been  raised  much 
above  the  deplorable  standard  above  described;  and  in 
spite  of  the  frightful  cost  of  the  wars  with  Napoleon, 
that  condition  probably  continued  to  improve.  Many 
things  beside  food,  Smith  pointed  out,  are  required  by 
common  laborers.  It  is  worth  while  to  repeat  his  words : 
"  By  necessaries  I  understand,  not  only  the  commodities 
which  are  indispensably  necessary  for  the  support  of  life, 
but  whatever  the  custom  of  the  country  renders  it  indecent 
for  creditable  people,  even  of  the  lowest  order,  to  be  with- 
out. A  linen  shirt,  for  example,  is  strictly  speaking  not 
a  necessary  of  life.  The  Greeks  and  Romans  lived,  I  sup- 
pose, very  comfortably,  though  they  had  no  linen.  But  in 
the  present  times,  through  the  greater  part  of  Europe,  a 
creditable  day-laborer  would  be  ashamed  to  appear  in  pub- 
lic without  a  linen  shirt,  the  want  of  which  would  be  sup- 
posed to  denote  that  disgraceful  degree  of  poverty,  which, 
it  is  presumed,  nobody  can  well  fall  into  without  extreme 
bad  conduct.  Custom,  in  the  same  manner,  has  rendered 
leather  shoes  a  necessary  of  life  in  England.  The  poorest 
creditable  person  of  either  sex  would  be  ashamed  to  appear 
in  public  without  them.  In  Scotland,  custom  has  rendered 


TAXES  ON  EXPENSE  177 

them  a  necessary  of  life  to  the  lowest  order  of  men;  but 
not  to  the  same  order  of  women,  who  may,  without  any  dis- 
credit, walk  about  barefooted.  In  France  they  are  neces- 
saries neither  to  men  nor  to  women;  the  lowest  rank  of 
both  sexes  appearing  there  publicly,  without  any  discredit, 
sometimes  in  wooden  shoes  and  sometimes  barefooted. 
Under  necessaries  therefore,  I  comprehend,  not  only  those 
things  which  nature,  but  those  things  which  the  established 
rules  of  decency,  have  rendered  necessary  to  the  lowest 
rank  of  people.  All  other  things  I  call  luxuries ;  without 
meaning  by  this  appellation  to  throw  the  smallest  degree 
of  reproach  upon  the  temperate  use  of  them.  Beer  and 
ale,  for  example,  in  Great  Britain,  and  wine,  even  in  the 
wine  countries,  I  call  luxuries.  A  man  of  any  rank  may, 
without  any  reproach,  abstain  totally  from  tasting  any  such 
liquors.  Nature  does  hot  render  them  necessary  for  the 
support  of  life,  and  custom  nowhere  renders  it  indecent  for 
people  to  live  without  them." 

It  follows,  Adam  Smith  concluded,  that  as  a  tax  on  the 
necessary  articles  of  subsistence  raised  their  price,  it  must 
correspondingly  raise  wages.  The  laborer  must  still  be  able 
to  purchase  those  things  which  it  would  be  indecent  for  him 
to  go  without.  But  it  is  otherwise  with  taxes  on  luxuries ; 
the  rise  in  their  price  will  not  necessarily  occasion  any  rise 
in  the  wages  of  labor.  A  tax  on  tobacco,  for  example, 
though  a  luxury  of  the  poor  as  well  as  of  the  rich,  will  not 
raise  wages.  A  tax  of  three  times  its  original  price  in 
England,  and  fifteen  times  in  France,  seemed  not  to  affect 
wages.  So  of  the  taxes  on  tea  and  sugar,  which  had  become 
luxuries  of  the  lowest  order  of  people  in  England  and  Hol- 
land ;  and  so  of  the  taxes  on  alcoholic  liquors.  "  The  rise 

in  the  price  of  porter,  occasioned  by  an  additional  tax  of 

12 


178  THE  METHODS  OF  TAXATION 

three  shillings  upon  the  barrel  of  strong  beer,  has  not 
raised  the  wages  of  common  labor  in  London.  They  were 
about  eighteen-pence  and  twenty-pence  a  day  before  a  tax, 
and  they  are  not  more  now." 

To  these  conclusions  Adam  Smith  added  certain  others 
of  very  great  importance.  The  sober  and  industrious  poor, 
he  declared,  are  disposed  by  sumptuary  taxes  to  limit  their 
expense  for  superfluities  which  they  can  no  longer  easily 
afford.  But  it  is  the  sober  and  industrious  poor  who  gen- 
erally bring  up  the  most  numerous  families,  and  who  prin- 
cipally supply  the  demand  for  useful  labor.  "  All  the  poor, 
indeed,  are  not  sober  and  industrious,  and  the  dissolute 
and  disorderly  might  continue  to  indulge  themselves  in 
the  use  of  such  commodities  after  this  rise  of  price  in  the 
same  manner  as  before,  without  regarding  the  distress 
which  this  indulgence  might  bring  upon  their  families. 
Such  disorderly  persons,  however,  seldom  rear  up  numerous 
families ;  their  children  generally  perishing  from  neglect, 
mismanagement,  and  scantiness  or  unwholesomeness  of 
their  food.  If  by  the  strength  of  their  constitution  they 
survive  the  hardships  to  which  the  bad  conduct  of  their 
parents  exposes  them,  yet  the  example  of  that  bad  conduct 
commonly  corrupts  their  morals ;  so  that,  instead  of  being 
useful  to  society  by  their  industry,  they  become  public 
nuisances  by  their  vices  and  disorders.  Though  the  ad- 
vanced price  of  the  luxuries  of  the  poor,  therefore,  might 
increase  somewhat  the  distress  of  such  disorderly  families, 
and  thereby  diminish  somewhat  their  ability  to  bring  up 
children,  it  would  not  probably  diminish  much  the  useful 
population  of  the  country." 

The  foundation  for  a  consistent,  if  not  a  scientific,  svs- 

'  /        t/ 

tern  of  taxation  thus  laid  by  Adam  Smith  was  completed  by 


TAXES  ON  EXPENSE  179 

his  showing  that  it  was  indispensable,  for  purposes  of  rev- 
enue, to  tax  laborers.  As  he  observed,  "  the  whole  con- 
sumption of  the  inferior  ranks  of  people,  or  of  those  below 
the  middling  rank,  ...  is  in  every  country  much  greater, 
not  only  in  quantity,  but  in  value,  than  that  of  the  middling 
and  of  those  above  the  middling  rank.  The  whole  expense 
of  the  inferior  is  much  greater  than  that  of  the  superior 
ranks.  .  .  .  The  taxes  upon  expense,  therefore,  which  fall 
chiefly  upon  that  of  the  superior  ranks  of  people,  upon  the 
smaller  portion  of  the  annual  produce,  are  likely  to  be 
much  less  productive  than  either  those  which  fall  indiffer- 
ently upon  the  expense  of  all  ranks,  or  even  those  which 
fall  chiefly  upon  that  of  the  inferior  ranks;  than  either 
those  which  fall  indifferently  upon  the  whole  annual  prod- 
uce, or  those  which  fall  chiefly  upon  the  larger  portion  of 
it.  The  excise  upon  the  materials  and  manufacture  of 
home-made  fermented  and  spirituous  liquors  is  accord- 
ingly, of  all  the  different  taxes  upon  expense,  by  far  the 
most  productive;  and  this  branch  of  the  excise  falls  very 
much,  perhaps  principally,  upon  the  expense  of  the  com- 
mon people." 

It  should  be  added  that  liquors  fermented  or  distilled, 
not  for  sale  but  for  private  use  —  as  is  now  substantially 
the  case  in  France  —  were  not  then  subject  to  excise,  the 
exemption  being  more  to  the  advantage  of  the  rich,  who 
brewed  their  own  beer,  than  of  the  poor,  who  bought  theirs 
at  the  brewery  or  alehouse.  This  exemption  from  very 
heavy  taxes  which  are  paid  by  the  poor  laborer  and  arti- 
ficer, Smith  declared,  was  very  unjust  and  unequal,  and  the 
substitution  of  a  duty  on  malt,  which  he  demonstrated  was 
fiscally  preferable  to  the  existing  excise,  was  desirable  as 
a  social  reform. 


180  THE  METHODS  OF  TAXATION 

It  is  hardly  too  much  to  say  that  the  reconstruction  of 
the  whole  fabric  of  English  taxation  according  to  the  prin- 
ciples established  by  the  great  Scottish  economist,  is  the 
most  splendid  instance  in  the  history  of  the  world  of  the 
application  of  reason  in  the  affairs  of  government.  Nor  is 
it  too  much  to  say  that  the  resulting  system  has  been  on  the 
whole  intended  to  conform  to  the  demands  of  humanity 
commonly  recognized  by  the  English  people.  It  ap- 
proaches, theoretically,  nearer  to  perfection  than  any  other 
system  of  taxation  that  has  ever  prevailed.  It  is  true  that 
the  motives  to  which  Smith  appealed  were  not  all  of  the 
most  exalted  character.  The  things  necessary  to  the  com- 
fortable subsistence  of  the  poor  were  not  to  be  taxed,  be- 
cause the  rich  would  have  to  pay  the  tax  in  the  shape  of 
increased  wages ;  but  while  to  act  according  to  selfish  ad- 
vantage does  not  command  our  enthusiastic  admiration,  to 
follow  the  dictates  of  an  enlightened  self-interest  is  not 
easily  to  be  distinguished  from  virtue.  When  Smith  wrote, 
not  only  was  the  bread  of  the  laborer  taxed,  but  four  of  the 
chief  necessaries  of  his  life;  salt,  leather,  soap,  and 
candles,  as  well  as  coals,  wool,  and  other  materials  in  com- 
mon use.  All  have  been  freed  from  taxation;  and  even 
sugar,  which  was  called  a  luxury,  was  exempted  in  1874, 
although  this  exemption  has  now  ceased.  On  the  other  hand 
the  taxes  intended  to  fall  on  the  rich  have  been  retained; 
the  house  tax,  the  tax  on  armorial  bearings,  on  carriages, 
on  man-servants,  on  wines,  on  sporting.  Even  the  railway 
passenger  tax  has  been  levied  on  travelers  by  first  and  sec- 
ond, but  not  by  third-class  carriages.  On  the  whole,  the 
theory  of  taxing  classes  of  men  is  consistently  applied. 
Landlords  and  capitalists  pay  taxes  on  rents  and  on  income 
in  general,  and  their  estates  are  subjected  to  progressive 


TAXES  ON  EXPENSE  181 

death-duties.  Laborers  pay  chiefly  on  what  are  called  their 
luxuries  —  alcoholic  drinks,  tobacco,  and  tea ;  and  the 
rich  are  also  taxed  on  their  expense  for  such  luxuries. 

Yet  this  inquiry  is  not  primarily  concerned  either  with 
the  theoretical  perfection,  or  the  practical  efficiency  of  any 
system  of  taxation.  We  have  to  determine  how  far  taxa- 
tion can  be  shown  on  rational  grounds  to  conform  to  recog- 
nized standards  of  justice,  and  we  have  already  seen  that 
the  income  tax  is  on  such  grounds  indefensible.  Further- 
more, the  assumption  on  which  the  doctrine  of  economic 
classes  is  based  must  be  submitted  to  the  test  of  reason. 
Justice,  it  seems  plain  enough,  has  regard  to  individual 
persons ;  when  a  man  is  compelled  to  submit  to  an  exaction 
which  causes  him  peculiar  suffering,  it  is  no  answer  to  his 
complaint  to  tell  him  that  he  belongs  to  a  class  which  does 
not  suffer.  Class  is  a  general  name;  it  denotes  concrete 
individuals ;  but  the  group  in  which  they  are  conceived  is 
a  metaphysical  entity,  which  is  not  to  be  confounded  with 
the  actual  human  being,  or  treated  as  if  it  were  of  the  same 
order  of  existences.  The  doctrine  of  averages  is  of  immense 
convenience  in  statistics;  we  may  ascertain  with  some 
degree  of  accuracy  the  average  height  of  the  inhabitants 
of  a  country,  or  their  average  weight,  or  the  average  dura- 
tion of  their  lives.  We  may  perhaps  even  learn  their 
average  intellectual  capacity  or  moral  purity.  But  we 
should  obviously  be  guilty  of  the  most  cruel  injustice  if 
we  were  to  estimate  the  virtue  of  an  individual  woman  by 
any  principle  of  averages;  her  chastity  is  not  to  be  im- 
pugned because  of  the  frailty  of  many  of  her  sex.  There 
may  be  an  average  percentage  of  dishonesty  among  serv- 
ants ;  but  this  means  only  that  some  individuals  are  honest 
and  some  are  not,  and  no  one  would  accuse  a  faithful 


182  THE  METHODS  OF  TAXATION 

domestic  of  stealing  because  of  the  doctrine  of  chances  or 
general  probabilities.1 

These  considerations  cannot  be  ignored  in  taxation.  If 
justice  is  to  be  attained  it  must  be  through  equality  of 
sacrifices  by  individuals,  and  the  fact  that  the  aggregate 
sacrifices  of  a  great  many  persons  divided  by  their  number 
would  give  a  certain  average  sacrifice  on  the  part  of  each, 
is,  so  far  as  justice  is  concerned,  immaterial.  To  maintain 
the  contrary  would  be  nearly  as  absurd  as  to  insist  that  a 
man  aged  fifty  must  really  be  forty  years  old,  because  he 
belongs  to  a  class  of  which  that  is  the  average  age,  or  to 
treat  a  permanent  invalid  as  shamming,  because  in  the 

1  Mr.  Gladstone's  criticism  of  this  doctrine  deserves  to  be  quoted. 
He  said:  "It  is  commonly  stated  that,  though  we  cannot  do  justice 
to  each  individual,  we  may  do  justice  as  between  classes;  and  that  for 
this  purpose  we  must  take  an  average  of  each  class  within  itself.  Now, 
I  question  the  doctrine  of  those  who  propose  to  do  justice  between  the 
various  kinds  of  income  by  establishing  averages  for  each  class  within 
itself.  ...  In  the  name  of  reason  and  common  sense,  I  ask  how  those 
who  demand  either  equality,  or  an  approach  to  it,  can  obtain  it  by 
averaging  classes  of  income?  Look  at  annuities.  The  tables  give  the 
value  of  female  life  at  fifteen  years  of  age  at  twenty-five  years'  purchase; 
but  go  upwards  to  seventy  or  seventy-five  years  of  age,  and  the  value 
of  the  life  is  only  five  years'  purchase :  yet  you  propose  to  average,  for- 
sooth, these  dissimilar  cases  —  to  bring  up  the  value  of  the  five  years' 
purchase  and  bring  down  the  value  of  the  twenty-five  years'  purchase 
to  a  common  standard.  What  possible  average  can  these  interests 
admit  of?  A  life  of  twenty-five  years'  purchase  is  five  times  the  value 
of  one  of  five  years'  purchase.  Will  it  be  any  consolation  to  the  life  of 
five  years'  purchase,  when  called  on  to  pay  three  times  as  much  as  he 
ought,  on  the  principles  of  the  reformers  of  the  tax,  to  pay,  that  the  life 
of  twenty-five  years'  purchase  pays  only  half  as  much  as  he  should  do? 
Still  more  absurd  would  be  the  attempt  to  average  trades.  Many  trades 
are  worth  twenty-five  years'  purchase.  .  .  .  Let  us,  however,  state  the 
case  moderately,  and  say  that  some  trades  are  worth  twenty-five  years' 
purchase;  there  are  others  not  worth  more  than  five,  four,  or  three 
years'  purchase,  and  how  are  you  to  average  the  interest  of  a  trade 
worth  three  and  another  worth  twenty-five  years'  purchase?  I  must 
enter  my  protest  against  this  averaging  of  classes  as  a  mode  of  what  is 
called  doing  justice  in  the  matter  of  the  income  tax." 


TAXES  ON  EXPENSE  183 

class  to  which  he  is  assigned  he  is  entitled  to  be  sick  only 
three  days  in  a  year.  The  only  ground  for  including  a 
number  of  objects  in  a  class,  is  their  common  possession  of 
certain  attributes  or  qualities,  and  we  can  reason  concern- 
ing a  class  only  in  so  far  as  we  reason  concerning  those 
qualities.  Furthermore,  the  larger  the  class,  the  smaller  is 
the  number  of  qualities  that  it  includes;  denotation  and 
connotation  vary  inversely.  Man  is  a  very  general  name ; 
the  great  number  of  individuals  that  it  denotes  severely 
limits  its  connotation,  and  the  fact  that  a  Chinaman  and 
a  Spaniard  are  both  men  enables  us  to  draw  comparatively 
few  inferences  concerning  them.  Laborer  is  also  a  very 
general  name;  it  is  applied  to  an  enormous  number  of 
human  beings  who  may  have  very  little  resemblance  to  one 
another,  and  in  fact  very  few  assertions  concerning  the 
laboring  class  have  any  pretence  to  accuracy. 

For  what  is  the  differentia  of  this  class  ?  Is  it  the  per- 
formance of  manual  labor  ?  And  does  manual  labor  mean 
muscular  exertion ;  and,  if  so,  is  it  with  or  without  intel- 
lectual activity?  Is  it  manual  labor  to  telegraph,  but  not 
to  telephone,  to  operate  a  type- writer,  but  not  to  use  a  pen  ? 
Is  it  manual  labor  to  give  lessons  in  gymnastics,  but  not  in 
writing;  to  play  on  the  piano,  but  not  to  sing?  Is  it 
manual  labor  to  care  for  babes,  but  not  to  nurse  bed-ridden 
adults  ?  Enter  a  modern  machine  shop,  and  you  behold  a 
number  of  men  apparently  doing  nothing;  really  the 
machines  are  doing  the  work,  and  the  men  are  watching  to 
see  that  it  is  done  properly.  When  hand  brakes  were  in 
general  use  a  great  deal  of  muscular  exertion  was  required 
to  operate  them ;  have  the  brakemen  ceased  to  be  laborers 
because  the  air-brakes  are  operated  by  steam  ?  Are  semp- 
stresses laborers,  but  saleswomen  not?  The  occupation 


184  THE  METHODS  OF  TAXATION 

of  a  bank  clerk  is  properly  called  extremely  laborious;  is 
he  properly  called  a  laborer  ? 

It  may  be  said  that  it  is  not  the  exertion  of  the  muscles 
that  constitutes  the  differentia,  but  the  receipt  of  com- 
pensation for  services.  Vast  numbers  of  men  exercise 
vigorously,  but  their  exertion  is  not  regarded  as  labor 
because  it  is  not  paid  for  by  any  one;  if  they  exerted 
themselves  for  pay  they  would  be  laborers.  But  soldiers 
might  according  to  this  definition  be  classed  as  laborers, 
which  is  certainly  paradoxical.  And  if  every  one  who 
does  another  a  service  for  pay  is  a  laborer,  lawyers  and 
doctors  must  be  called  laborers,  and  this  too  is  contrary  to 
usage.  Nor  does  it  seem  to  be  material  that  payment  is 
sometimes  made  daily  or  weekly,  and  sometimes  by  the 
month,  or  even  by  the  year.  It  is  still  common  for  laborers 
on  the  land  to  hire  themselves  by  the  year;  and  teachers 
may  be  paid  by  the  hour.  Many  clerks  are  employed  by 
the  week  or  month,  and  many  miners  and  workmen  in 
mills  by  the  year.  Possibly  it  might  be  maintained  that 
whoever  received  a  compensation  that  was  commonly  called 
wages  was  a  laborer,  but  not  if  his  compensation  was  called 
by  another  name.  But  this  appears  to  be  a  mere  verbal 
distinction,  for  men  doing  similar  work  are  said  sometimes 
to  receive  salaries,  and  sometimes  wages.  Moreover,  vast 
numbers  of  men  work  for  themselves,  and  for  others  at  the 
same  time ;  they  are  their  own  employers,  and  they  in  fact 
receive  both  wages  and  profits.  They  certainly  perform 
labor,  and  the  products  of  their  labor  are  of  service  to  the 
community;  but  they  are  not  said  to  receive  wages,  and 
are  not  called  laborers. 

The  existence  of  this  latter  class  proves  that  we  cannot 
now,  whatever  may  have  been  true  in  the  past,  make  an 


TAXES  ON  EXPENSE  185 

economic  class  of  laborers.  Probably  the  nearest  approach 
to  a  differentia  would  be  comparative  poverty;  we  might 
say  that  men  who  did  work  for  others  for  a  very  small 
compensation  were  laborers.  The  value  of  this  distinction, 
however,  is  due  to  the  fact  that  it  is  a  real  distinction 
between  two  economic  classes,  the  rich  and  the  poor.  It  is 
no  doubt  true  that  unless  they  worked  for  others  some 
persons  would  starve  and  that  some  would  not.  Yet  a 
great  many  people  who  do  work  for  others  could  still  live 
comfortably,  although  more  simply,  if  they  did  no  work. 
They  are  rich,  but  they  prefer  to  have  a  larger  income  than 
suffices  to  maintain  life.  And  this  is  true  of  vast  numbers 
of  those  who  perform  manual  labor,  whether  light  or  heavy ; 
they  could  subsist  on  much  less  than  they  earn,  perhaps  on 
what  they  have  saved  from  their  earnings,  and  they  often 
give  up  work  when  they  find  their  strength  declining.  In 
this  country,  at  least,  it  might  almost  be  said  that  there  is 
in  fact  no  "  irreducible  minimum  " ;  there  is  no  consider- 
able number  of  persons  who  could  not  live  on' smaller  in- 
comes than  they  receive.  They  could  also  marry  and  rear 
families ;  for,  under  the  modern  system  of  industry,  wives 
may  earn  a  good  deal  by  working  away  from  their  homes, 
and  the  support  of  children,  from  birth  to  maturity,  can 
be  largely  thrown  on  the  public.  There  are  free  lying-in 
hospitals,  free  creches  or  day  nurseries,  free  schools,  with 
free  transportation  thereto,  free  medical  attendance  and 
prospectively  free  lunches,  together  with  numberless 
"  homes,"  and  unbounded  private  alms. 

Even  if  we  limit  our  reasoning  to  such  persons  as  re- 
ceive a  compensation  for  manual  labor  called  wages,  we 
cannot  assume  that  they  are  comparatively  poor.  Skilled 
mechanics  often  earn  more  in  a  year  than  many  lawyers 


186  THE  METHODS  OF  TAXATION 

or  doctors  or  clergymen.  They  commonly  earn  more  than 
clerks  and  perhaps  twice  as  much  as  teachers.  A  skilled 
laborer  in  the  City  of  New  York  receives  usually,  perhaps, 
a  larger  compensation  than  many  a  professor  in  our  col- 
leges, than  not  a  few  judges,  and  in  some  cases  three  times 
as  much  as  most  country  ministers.  Some  of  those  em- 
ployed in  iron  works  are  said  to  earn  ten  and  even  fifteen 
dollars  a  day;  which  is  ten  or  fifteen  times  what  many 
common  laborers  receive.  Even  in  the  same  kind  of  in- 
dustry, wages  differ  greatly  in  different  parts  of  the  coun- 
try. In  the  City  of  New  York  the  workmen  employed  in 
the  building  trades  obtain  as  much  for  an  hour's  work  as 
men  similarly  employed  in  some  parts  of  the  country  get 
for  working  a  half,  or  even  a  whole  day.  Now  if  the  pur- 
pose of  assuming  the  existence  of  a  laboring  class  is  to 
assess  the  average  income  of  its  members,  it  seems  clear  that 
very  great  inequality  of  sacrifice  on  the  part  of  individuals 
must  result.  Modern  economists,  we  may  add,  are  inclined 
to  class  many  persons  as  laborers  who  would  not  have  been 
formerly  so  described.1 

As  a  matter  of  fact,  no  one  has  illustrated  the  inequali- 
ties in  laborer's  wages  more  strikingly  than  Adam  Smith 

1  Sidgwick,  for  example,  extends  the  meaning  of  "production"  so 
as  to  include  in  it  the  labor  of  carriers  and  traders,  no  less  than  that  of 
farmers  and  manufacturers.  Pol.  EC.,  p.  98.  And  he  also  includes  "in 
the  notion  of  labor  that  earns  wages  all  remunerated  employment  of 
time  and  energies;  and  therefore  the  exertions,  intellectual  and  mus- 
cular, of  the  employer  no  less  than  those  of  the  employed."  Ibid.,  p.  320. 
He  adds  also  that  "there  is  hardly  any  branch  of  industry  in  which  a 
laborer  stronger,  more  industrious,  more  skilful,  or  more  careful  than 
his  fellows  is  not  likely  in  one  way  or  another  to  obtain  more  than  the 
average  rate  of  remuneration."  Such  a  laborer  is  only  indirectly  con- 
cerned in  the  average  rate  of  wages  in  his  own  industry.  He  is  even 
less  concerned  in  the  variations  in  an  average  found  by  dividing  the 
aggregate  of  workers'  remuneration  among  the  aggregate  of  workers. 
Ibid.,  p.  328. 


TAXES  ON  EXPENSE  187 

himself.  He  enumerates  five  circumstances  in  the  nature 
of  employments  which  vary  the  wages  of  labor,  a  number 
to  which  later  economists  have  made  some  additions,  and 
he  explains  how  the  "  policy  of  Europe  "  has  occasioned 
other  inequalities  of  much  greater  importance.  It  is  un- 
necessary to  do  more  than  refer  to  so  classical  an  analysis ; 
but  it  shows  how  vague  the  meaning  of  "  the  laboring  class  " 
has  always  been.  As  we  have  seen,  when  Smith  deals  with 
taxation,  he  divides  workmen  into  the  sober  and  industri- 
ous, and  the  dissolute  and  disorderly;  and  much  of  his 
reasoning  applies  to  the  "  lowest  rank  "  or  "  lowest  order  " 
of  the  people.  These  classifications  are  certainly  impor- 
tant; but  they  have  no  essential  relation  to  the  classes  of 
wage-receivers,  or  of  laborers.  The  full  significance  of  this 
point  will  appear  if  we  examine  what  is  involved  in  his 
view  of  the  taxation  of  luxuries. 

The  classification  as  a  luxury  of  any  object  of  desire  not 
indispensable  to  existence  depends  solely,  according  to  his 
statement,  on  the  relation  which  the  consumption  of  that 
object  bears  to  decency,  or  the  state  of  public  opinion  con- 
cerning its  use.  Whatever  a  man  may  dispense  with  with- 
out incurring  discredit,  is  a  luxury,  no  matter  how  uni- 
versal its  use,  or  how  wholesome  it  may  be.  Yet,  even 
when  he  wrote,  his  reference  to  leather  shoes  showed  that 
the  standard  of  decency  varied  in  different  parts  of  the 
same  country,  and  his  illustration  taken  from  the  use  of 
linen  shows  that  such  standards  vary  not  only  from  place 
to  place  but  also  from  time  to  time;  for  linen  shirts  are 
now  worn  only  by  some  of  the  richer  members  of  society. 
As  he  explained,  potatoes  are  a  cheaper  food  than  oats,  and 
oats  than  wheat;  the  common  people  of  Ireland  subsisted 
largely  on  potatoes,  those  of  Scotland  on  oatmeal,  and 


188  THE  METHODS  OF  TAXATION 

those  of  England  on  wheaten  bread.  Now  potatoes  are  "  pe- 
culiarly suitable  to  the  health  of  the  human  constitution  " ; 
as  much  so  as  wheat,  and  more  so  than  oats.  "  The  chair- 
men, porters,  and  coal-heavers  in  London,  and  those  unfor- 
tunate women  who  live  by  prostitution,  the  strongest  men 
and  the  most  beautiful  women  perhaps  in  the  British  do- 
minions, are  said  to  be,  the  greater  part  of  them,  from  the 
lowest  rank  of  people  in  Ireland,  who  are  generally  fed 
with  this  root.  No  food  can  afford  a  more  decisive  proof  of 
its  nourishing  quality." 

It  is  certainly  not  true  now,  and  it  was  perhaps  not  true 
when  Smith  wrote,  that  the  use  of  potatoes  by  an  English 
family  would  be  regarded  as  indecent.  And  it  is  unques- 
tionably true  now,  and  was  on  his  own  showing  true  then, 
that  the  ordinary  laborer  consumed  many  things  beyond 
what  decency  required.  There  exist  very  great  differences 
in  the  quality  of  things  comprehended  under  one  name. 
We  speak  of  meat,  meaning  usually  the  flesh  of  graminiv- 
erous  animals,  including  swine.  The  number  of  varieties 
of  meat,  however,  is  much  greater  than  that  of  the  species 
of  these  animals.  Every  one  that  has  any  acquaintance 
with  agriculture  knows  that  wide  differences  in  value  exist 
between  different  individuals  of  the  same  species,  and 
every  one  that  carries  on  a  household  knows  that  the  prices 
of  different  parts  of  the  same  individual  are  very  divergent. 
All  these  differences  vary  in  different  parts  of  the  same 
country,  and  are  even  wider  in  different  countries.  When 
we  speak  of  the  consumption  of  meat  by  laborers,  therefore, 
we  are  using  a  very  ambiguous  expression.  We  may  have 
in  mind  the  cheaper  parts  of  the  cheaper  grades  of  swine 
or  oxen,  while  our  hearers  may  understand  the  more  ex- 
pensive parts  of  the  corn-fed  steers  of  the  west,  or  perhaps 


TAXES  ON  EXPENSE  189 

the  choicest  poultry.  The  cost  of  what  we  have  in  mind 
may  not  be  a  quarter,  or  even  a  tenth,  of  what  we  are  under- 
stood to  mean ;  and  corresponding  differences  in  consump- 
tion actually  take  place.  There  are,  however,  no  corre- 
sponding differences  in  nutritive  power,  and  it  can  scarcely 
be  contended  that  decency  forbids  any  one  to  use  in  his 
own  house  the  cheaper  kinds  of  food.  Decency,  in  Adam 
Smith's  sense,  means  what  is  required  by  public  opinion; 
and  whatever  may  be  true  of  private  gossip,  the  contents 
of  the  ordinary  larder  do  not  fall  within  the  cognizance  of 
the  public. 

Adam  Smith's  illustrations  also  show  that  he  had  in 
mind  the  clothing  in  which  men  appear  in  public.  But  the 
differences  in  the  quality  and  the  cost  of  clothing  are  much 
greater  than  in  the  case  of  food.  Even  in  his  day,  there 
was  a  great  difference  between  coarse  and  fine  linen ;  and 
in  modern  times  the  qualities  of  cotton  and  woolen  fabrics, 
and  of  their  manufacture  into  clothing,  are  numberless. 
Decency  does  not  forbid  the  use  of  many  of  the  cheaper 
grades  by  "  creditable  day-laborers  " ;  women,  indeed,  of 
the  poorer  class  are  often  thought  more  creditable  when 
their  attire  is  not  expensive,  than  when  it  is  noticeably  so. 
Whatever  may  have  been  true  in  the  past,  it  seems  impos- 
sible to  deny  that  in  modern  times  a  very  large  part  of  the 
expense  of  the  mass  of  the  people  is  for  things  that  they  are 
not  required  to  use  by  decency;  things  of  higher  quality, 
for  which  cheaper  things  of  the  same  kind,  or  cheaper  sub- 
stitutes, could  without  injury  to  health  be  employed.  If 
this  conclusion  is  valid,  we  cannot  accept  Adam  Smith's 
definition  of  a  luxury  as  satisfactory.  It  is  not  the  defini- 
tion that  we  should  now  give  to  the  word;  and  there  is 
reason  to  maintain  that  he  did  not  always  adhere  to  it. 


190  THE  METHODS  OF  TAXATION 

In  the  first  place,  as  we  have  already  noticed,  he  called 
attention  to  the  fact  that  the  whole  consumption  of  the 
inferior  ranks  of  people  is  much  greater,  not  only  in  quan- 
tity but  also  in  value,  than  that  of  the  middling  and  supe- 
rior ranks.  Almost  the  whole  capital  of  every  country,  he 
declared,  is  annually  distributed  as  wages  of  productive 
labor.  Much  of  rent  and  profit  is  distributed  in  the  main- 
tenance of  the  lower  rank,  as  wages  of  unproductive  labor. 
The  taxes  upon  expense,  therefore,  which  fall  chiefly  upon 
that  of  the  superior  ranks  of  people,  are  likely  to  be  much 
less  productive  than  either  those  which  fall  indifferently 
on  the  expense  of  all  ranks,  or  those  which  fall  chiefly  upon 
that  of  the  inferior  ranks.  This  conclusion  he  regarded 
as  proved  by  the  results  of  the  excise. 

Accepting  this  conclusion,  which  indeed  seems  indisput- 
able, we  see  that  the  excise  must  fall  on  all,  or  nearly  all, 
of  the  inferior  rank  of  people ;  for  if  it  were  paid  by  but  a 
few  of  them  it  would  be  unproductive,  instead  of  being  the 
most  productive  of  all  taxes.  It  is  true  that  Adam  Smith 
makes  some  attempt  to  show  that  this  tax  may  be  paid  only 
by  the  immoral  members  of  this  rank.  He  divides  this 
class  into  two  classes  for  that  purpose ;  the  sober  and  indus- 
trious poor,  and  the  dissolute  and  disorderly.  It  is  implied 
that  only  the  latter  class  may  submit  to  this  tax ;  but  unless 
the  latter  class  is  a  very  large  one,  this  implication  cannot 
be  correct.  Now  neither  Smith,  nor  perhaps  any  one  else, 
would  contend  that  laborers  are,  as  a  rule,  dissolute  and 
disorderly.  Persons  of  that  description  constitute  but  a 
small  part  of  the  whole  number.  Hence  their  payments  to 
the  excise  would  amount  to  comparatively  little;  and  the 
sober  and  industrious  must  pay  by  far  the  greater  part  of 
this  tax.  Whether  the  objects  subjected  to  this  tax  be 


TAXES  ON  EXPENSE  191 

properly  called  luxuries  or  not,  they  are  objects  the  enjoy- 
ment of  which  the  common  people  will  not  deny  themselves, 
even  if  they  are  taxed  on  that  indulgence. 

It  is  to  be  noted,  too,  that  Adam  Smith  expressly  de- 
clared that  he  did  not  mean  to  throw  the  smallest  degree 
of  reproach  upon  the  temperate  use  of  them.  "  The  trade 
with  the  alehouse  is  not  necessarily  a  losing  trade.  In 
its  own  nature  it  is  just  as  advantageous  as  any  other, 
though  perhaps  somewhat  more  liable  to  be  abused." 
The  workman  may  no  doubt  buy  too  much  of  the  retailer 
of  fermented  liquors,  or  of  the  brewer,  "as  he  may  of 
any  other  dealers  in  his  neighborhood,  of  the  butcher,  if 
he  is  a  glutton,  or  of  the  draper,  if  he  affects  to  be  a  beau 
among  his  companions.  It  is  advantageous  to  the  great 
body  of  workmen,  notwithstanding,  that  all  these  trades 
should  be  free,  though  this  freedom  may  be  abused  in  all 
of  them,  and  is  more  likely  to  be  so,  perhaps,  in  some 
than  in  others.  Though  individuals,  besides,  may  some- 
times ruin  their  fortunes  by  an  excessive  consumption  of 
fermented  liquors,  there  seems  to  be  no  risk  that  a  nation 
should  do  so.  Though  in  every  country  there  are  many 
people  who  spend  upon  such  liquors  more  than  they  can 
afford,  there  are  always  many  more  who  spend  less."  * 

1  "It  deserves  to  be  remarked,  too,  that  if  we  consult  experience, 
the  cheapness  of  wine  seems  to  be  a  cause,  not  of  drunkenness,  but  of 
sobriety.  The  inhabitants  of  the  wine  countries  are  in  general  the 
soberest  people  in  Europe;  witness  the  Spaniards,  the  Italians,  and  the 
inhabitants  of  the  southern  provinces  of  France.  People  are  seldom 
guilty  of  excess  in  what  is  their  daily  fare.  Nobody  affects  the  char- 
acter of  liberality  and  good  fellowship  by  being  profuse  of  a  liquor 
which  is  as  cheap  as  small  beer.  On  the  contrary,  in  the  countries 
which,  either  from  excessive  heat  or  cold,  produce  no  grapes,  and 
where  wine  consequently  is  dear  and  a  rarity,  drunkenness  is  a  common 
vice,  as  among  the  northern  nations,  and  all  those  who  live  between 
the  tropics,  the  negroes,  for  example,  on  the  coast  of  Guinea.  When  a 


192  THE  METHODS  OF  TAXATION 

Since  the  number  of  things  entering  into  the  consump- 
tion of  the  common  people  is  now  much  greater  than 
formerly,  and  since  the  number  of  species  of  every  one  of 
these  things  is  also  considerable,  while  there  are  many 
grades  of  quality  among  these  species,  we  seem  obliged 
to  abandon  Adam  Smith's  definition  of  a  luxury  as  in- 
adequate. We  may,  perhaps,  define  it  as  something  the 
consumption  of  which  is  not  indispensable  to  healthy  ex- 
istence, but  by  doing  so  we  unavoidably  include  many 
things  commonly  spoken  of  as  necessaries.  We  are  driven 
therefore  to  attempt  to  classify  luxuries,  an  illustration 
of  which  appears  in  the  common  parlance  by  which  some 
things  are  called  harmless  luxuries  and  some  hurtful.  A 
further  distinction  is  made  between  things  which  men 
often  consume  to  excess;  that  is,  with  injurious  results 
to  themselves  and  to  those  dependent  on  or  connected 
with  them.  Now,  as  has  been  explained,  a  tax  on  anything 
not  consumed  in  great  quantities  is  of  small  consequence; 
the  revenue  so  arising  would  be  insignificant.  Hence  the 
thing  taxed  must  be  consumed  by  all,  or  nearly  all  the 
common  people.  But  it  seems  no  more  just  to  tax  the 
harmless  luxuries  of  the  poor  than  to  tax  their  neces- 


French  regiment  comes  from  some  of  the  northern  provinces  of  France, 
where  wine  is  somewhat  dear,  to  be  quartered  in  the  southern,  where 
it  is  very  cheap,  the  soldiers,  I  have  frequently  heard  it  observed,  are 
at  first  debauched  by  the  cheapness  and  novelty  of  good  wine;  but 
after  a  few  months'  residence  the  greater  part  of  them  become  as  sober 
as  the  rest  of  the  inhabitants.  Were  the  duties  upon  foreign  wines,  and 
the  excises  upon  malt,  beer,  and  ale,  to  be  taken  away  all  at  once,  it 
might  in  the  same  manner,  occasion  in  Great  Britain  a  pretty  general  and 
temporary  drunkenness  among  the  middling  and  inferior  ranks  of  peo- 
ple, which  would  probably  be  soon  followed  by  a  permanent  and  al- 
most universal  sobriety.  At  present  drunkenness  is  by  no  means  the 
vice  of  people  of  fashion,  or  of  those  who  can  easily  afford  the  most  ex- 
pensive liquors."  Wealth  of  Nations,  Book  IV,  Chap.  Ill,  Part  II. 


TAXES  ON  EXPENSE  193 

saries;  even  if  it  were  practicable  to  distinguish  such 
things  by  statute,  the  attempt,  if  understood  by  the  public, 
would  be  condemned.  Hence  the  tax  must  be  applied  to 
harmful  luxuries ;  to  things  universally  used  but  which  are 
harmful  if  used  at  all,  or  to  things  in  which  immoderate 
indulgence  is  very  general,  whether  they  be  intrinsically 
harmful  or  not.  The  justice  of  taxing  A  for  consuming 
a  thing  which  is  not  harmful  to  him,  because  B  consumes 
that  thing  intemperately,  may  be  considered  hereafter. 

Now  there  is  undoubtedly  a  general  belief  in  this  coun- 
try that  the  drinking  of  beverages  containing  alcohol  is 
not  essential  to  healthy  existence,  although  the  practice 
is  very  extensive  among  the  common  people;  and  there 
is  a  widespread  conviction  that  the  practice  is  positively 
hurtful.  Whether  the  moderate  use  of  such  drinks  is 
injurious  or  not,  it  is '  notorious  that  many  persons  are 
immoderate  in  their  use,  and  that  such  excess  is  seriously 
detrimental,  not  only  to  the  drunkard,  but  also  to  his 
family  and  to  the  community.  Similar  beliefs  prevail 
to  a  less  extent  concerning  the  use  of  tobacco.  So  power- 
ful are  these  convictions  that  many  persons  who  habitually 
consume  alcoholic  drinks  are  influenced  by  them,  and  re- 
gard their  own  practices  as  falling  somewhat  short  of  the 
highest  requirements  of  morality. 

No  doubt  many  persons  are  not  conscious  of  any  in- 
clination to  indulge  excessively  in  things  of  this  kind, 
and  either  regard  them  as  harmless  luxuries,  or  as  they 
regard  the  ordinary  necessaries  of  life.  They  are  so  re- 
garded in  most  European  countries,  and  have  always  been 
so.  Machiavelli  describes  a  campaign  undertaken  by  the 
Florentines,  which  they  were  obliged  to  abandon  because 
the  region  occupied  could  not  furnish  wine  for  the  soldiers ; 


194  THE  METHODS  OF  TAXATION 

to  subsist  without  wine  was  evidently  then  thought  impos- 
sible, and  in  many  places  it  would  be  thought  so  to-day. 
The  rulers  of  France  do  not  venture  to  tax  to  any  great 
extent  the  wine  which  is  universally  drunk  in  the  greater 
part  of  that  country,  nor  perhaps  would  a  heavy  tax  on 
beer  be  submitted  to  with  patience  in  Germany.  Sir 
Robert  Walpole  proposed  some  very  desirable  reforms  in 
the  English  excise,  but  he  was  compelled  to  abandon  them 
for  fear  of  a  rebellion.  The  ignorant  apprehension  of  the 
common  people  that  their  drink  might  be  more  heavily 
taxed,  stirred  up  by  certain  parties  interested  against  the 
reforms,  proved  an  insuperable  obstacle.1  The  tax  on 
distilleries  has  always  been  peculiarly  odious  in  Ireland, 
and  has  been  steadily  resisted  in  some  parts  of  our  own 
country.  The  mass  of  our  common  people,  however,  never 
having  known  a  time  when  tobacco  and  alcoholic  liquors 
were  untaxed,  and  being  wholly  incapable  of  estimating 
how  much  their  expenses  are  increased  by  such  taxation, 
cannot  be  said  to  have  any  convictions  on  the  subject; 
and  public  opinion,  whether  rationally  or  not,  appears 
to  be  overwhelmingly  in  favor  of  taxes  on  strong  drink, 
if  not  on  tobacco. 

Although  we  are  not  directly  concerned  with  the  ques- 
tion how  far  the  taxation  of  things,  the  excessive  con- 
sumption of  which  is  regarded  as  pernicious,  tends  to 
reduce  that  excess,  it  may  be  observed  that  no  satisfactory 

1  The  reform  proposed  by  Walpole  in  1733  was  really  the  establish- 
ment of  bonded  warehouses.  But  mobs  attacked  members,  petitions 
were  sent  in  from  the  City,  and  there  were  signs  of  general  rebellion. 
Parliament  declared  that  it  would  not  be  influenced  by  mob  rule,  but 
Walpole  said  that  in  the  temper  of  the  country  the  measure  could  not  be 
carried  without  armed  force,  and  that  there  would  be  an  end  to  the 
liberties  of  England  if  supplies  were  to  be  carried  by  the  sword.  The 
system  was  not  established  till  1803. 


TAXES  ON  EXPENSE  195 

proof  has  been  offered  that  there  is  less  drunkenness  in 
communities  where  alcoholic  drink  is  heavily  taxed  than 
elsewhere.  In  England,  where  the  excise  is  heaviest,  there 
is  much  drunkenness,  and  the  consumption  of  strong  liquors 
is  perhaps  greater  than  in  any  other  country.  We  have 
already  referred  to  Adam  Smith's  observation  on  the  habits 
of  soldiers  transferred  to  the  wine-growing  provinces  of 
France ;  and  it  is  well  to  remember  that  the  early  settlers 
of  New  England  were  accustomed  to  drink  ale  before 
they  emigrated,  and  regarded  water  as  an  unwholesome 
beverage.  To  be  compelled  to  drink  it  here  was  one  of 
their  greatest  hardships,  and  innkeepers  were  required  by 
law  to  furnish  ale  to  their  guests.  But  they  soon  learned 
to  produce  cider  in  prodigious  quantities,  and  at  a  later 
time  distilled  a  great  deal  of  rum.  Many  aged  persons, 
however,  whose  recollection  goes  back  to  the  days  when 
there  were  no  taxes  on  drink,  declare  that,  making  al- 
lowance for  the  general  improvement  of  morals,  drunken- 
ness was  no  greater  evil  then  than  now.  In  those  states 
where  drinking  is  prohibited  by  law,  so  far  as  prohibit- 
ing the  production,  selling,  or  giving  away  of  drink  can 
achieve  that  end,  there  appears  to  be  even  more  drunk- 
enness than  elsewhere.  Paradoxically  enough,  more 
drunkards  are  found  among  the  very  poor  than  in  the 
wealthier  classes.  It  might  be  supposed  that  the  wealthy 
would  not  give  up  their  accustomed  drinks  because 
they  were  heavily  taxed,  and  that  the  poor  would  do 
so.  But  while  there  is  much  testimony  to  the  effect 
that  the  well-to-do  are  more  temperate  than  formerly, 
we  find  little  evidence  that  this  is  true  of  the  poorest 
class. 

It  seems  probable  that  the  very  poor,  being  often  very 


196  THE  METHODS  OF  TAXATION 

miserable,  have  an  intense  desire  for  whatever  gives  them 
relief  from  their  sufferings,  even  if  it  be  but  temporary, 
and  if  they  cannot  otherwise  obtain  it,  will  deny  them- 
selves, to  a  considerable  extent,  food,  clothing,  and  other 
things  which  appear  to  those  more  comfortably  situated 
indispensable  to  existence.  They  seek  "  some  short  cut 
to  happiness,  some  moments  of  emancipating  excitement." 
Strong  drink  gives  them  warmth  and  exhilaration.  It 
brings  them  brief  oblivion  of  their  present  misery  and 
of  their  hopeless  future.  Similar  effects  seem  to  be  pro- 
duced by  other  stimulants,  such  as  opium  and  perhaps 
tea.  The  almost  universal  consumption  of  tobacco,  even 
by  those  who  can  obtain  it  only  by  stinting  themselves  in 
the  use  of  what  are  called  necessaries,  indicates  that  it 
serves  an  important  purpose,  the  precise  nature  of  which 
appears  to  be  imperfectly  understood  by  physiologists.  It 
is  certainly  paradoxical  to  describe  as  luxuries  such  things 
as  tobacco,  which  are  generally,  in  the  estimation  of  those 
who  use  them,  more  indispensable  than  most  articles  of 
food ;  which  men,  it  is  true,  can  forego,  as  they  can  forego 
meat  and  fish  and  fruit  and  sugar,  but  which  they  will 
forego  only  after  they  have  reduced  their  consumption 
of  these  commodities. 

There  is  some  ground  for  believing  that  when  the  cost 
of  these  luxuries  of  the  poor,  if  they  are  to  be  so  termed, 
is  greatly  increased,  their  quality  becomes  much  impaired. 
The  quality  of  the  distilled  liquors  consumed  in  states 
where  their  sale  is  prohibited,  is  notoriously  inferior.  The 
common  people  in  those  states  often  drink  alcohol,  and 
other  imperfectly  refined  spirits,  the  physiological  effects 
of  which  are  very  injurious.  The  prohibition  of  the  traffic 
amounts  to  a  high  tax  on  liquor;  for  those  who  engage 


TAXES  ON  EXPENSE  197 

in  so  dangerous  an  occupation  must  be  compensated  with 
a  high  rate  of  profit.  Hence  fermented  liquors,  having 
little  alcoholic  strength  in  proportion  to  their  bulk,  and 
being  correspondingly  difficult  to  conceal,  are  replaced 
by  spirits  of  the  most  concentrated  form.  The  very  high 
excise  of  the  national  government  causes  much  illicit  dis- 
tillation, the  product  of  which  must  be  at  once  disposed 
of,  although  the  poisonous  elements  naturally  require  sev- 
eral years  for  their  elimination.  The  effects  of  these 
inferior  liquors  are  certainly  more  pernicious  than  those 
of  properly  distilled  spirits,  or  of  sound  wines  and  beers, 
and  they  are  believed  to  cause  drunkenness  of  a  peculiarly 
violent  character.  Complaint  is  also  heard  that  those 
who  are  prevented  from  obtaining  alcoholic  beverages  fre- 
quently resort  to  patent  medicines,  which  contain  much 
alcohol,  and  to  opium  and  other  drugs. 

It  may  be  added  here  that  the  Internal  Revenue  returns 
furnish  strong  evidence  that  neither  high  taxation  nor 
depressed  industry  has  much  effect  in  reducing  the  con- 
sumption of  these  luxuries;  indeed,  fermented  drinks 
are  now  consumed  to  an  enormously  greater  extent  than 
they  were  before  they  were  taxed  at  all.  In  the  year  1907 
the  revenue  from  distilled  spirits  was  over  $156,000,000, 
and  that  from  fermented  liquors  was  nearly  $60,000,000. 
The  decline  in  revenue  during  the  years  succeeding  the 
panic  of  1893,  when  revenue  from  other  sources  fell  off 
materially,  was  comparatively  moderate,  in  spite  of  in- 
creased taxation.  The  claim,  therefore,  that  these  beverages 
are  proper  subjects  of  special  taxation  because  those  who  use 
them  can  abstain  if  they  choose,  does  not  appear  to  deserve 
serious  consideration.  We  are  not  concerned  with  what 
men  can  do  if  they  choose,  but  with  what  they  in  actual 


198  THE  METHODS  OF  TAXATION 

life  choose  to  do.  Theologians  have  elaborately  explained 
that  men  have  the  power  to  be  sinless;  they  can,  it  is 
maintained,  always  choose  right.  In  practice,  however, 
they  also  explain  that  men  do  choose  wrong;  and  cer- 
tainly, in  legislation,  we  must  deal  with  men  according 
to  their  conduct  as  exhibited  in  experience,  and  not  as 
it  might  be  if  they  were  governed  by  other  motives  than 
those  which  are  actually  potent.  No  one  had  more  thor- 
ough information  concerning  these  subjects  than  the  late 
David  A.  Wells ;  and  his  conclusion  was  that  "  if  moral 
influences  have  ever  materialy  affected  the  general  con- 
sumption of  distilled  spirits  or  fermented  liquors  in  the 
United  States,  the  tabulated  tax  experiences  of  its  Gov- 
ernment, which  constitute  the  only  reliable  basis  for  form- 
ing an  opinion,  do  not  afford  any  indication  of  it."  l 

On  these  grounds  we  must  regard  it  as  doubtful  whether 
the  high  taxation  of  things,  the  excessive  use  of  which  is 
commonly  called  immoral,  has  much  effect  in  preventing 
such  excess,  even  if  it  is  not  positively  demoralizing. 
Should  this  conclusion  be  established,  the  problems  aris- 
ing from  the  taxation  of  articles  of  consumption  would 
be  simplified.  We  need  engage  in  no  controversy  concern- 
ing what  is  a  necessary  and  what  is  a  luxury,  or  whether 
it  is  just  to  compel  those  who  consume  certain  things  in 
moderation  to  pay  a  tax  on  them  because  it  is  thought 

1  The  president  of  the  Distilling  Company  of  America,  a  concern 
which  produces  a  large  portion  of  the  spirits  consumed  in  this  country, 
reports  that  when  a  state  legislature  enacts  a  prohibitory  law  the  sales 
of  his  company's  products  in  that  state  usually  increase.  During  the 
year  1897  the  tax  paid  on  distilled  spirits  showed  a  consumption  of 
some  64,000,000  gallons,  or  nine-tenths  of  a  gallon  per  head  of  popu- 
lation. For  fermented  liquors  the  corresponding  figures  were 
1,101,500,000,  and  15.4.  In  1907  the  number  of  gallons  of  distilled 
spirits  paying  tax  was  134,000,000,  or  1.58  gallons  per  head;  of  fer- 
mented liquors,  1,873,475,000,  or  22  gallons  per  head. 


TAXES  ON  EXPENSE  199 

desirable  to  tax  those  who  use  them  to  excess.  So  long 
as  such  controversies  engage  the  attention  of  the  legis- 
lature, it  seems  hopeless  to  attempt  to  treat  taxation  as 
a  science,  or  to  attain  any  approximation  to  the  ideal 
of  equality  of  burdens.  As  has  been  pointed  out,  public 
opinion  is  overwhelmingly  in  favor  of  taxing  certain 
things  called,  whether  properly  or  improperly,  luxuries, 
and  we  must  assume  that  such  taxes  will  long  be  retained. 
They  should  be  treated,  however,  on  the  same  principles 
as  taxes  on  other  things  commonly  consumed;  and  our 
experience  shows  that  they  tend  to  be  governed  by  these 
principles  even  when  others  are  involved.  The  important 
points  are  that  the  revenue  of  the  common  people  is  some- 
what more  than  sufficient  for  their  support,  that  a  tax 
on  anything  generally  consumed  by  them  may  transfer  a 
part  of  this  revenue  to  the  use  of  the  government,  and 
that  the  more  extensive  the  use,  the  more  productive  will 
the  tax  generally  be.  Salt  is  perhaps  more  universally 
consumed  than  any  other  commodity,  and  the  English 
government  derives  from  a  tax  upon  it  a  large  part  of 
the  revenue  which  it  requires  to  maintain  its  Indian 
Empire;  although  the  inhabitants  of  that  Empire  are 
perhaps  even  less  able  to  endure  taxation  than  the  com- 
mon people  of  England  were  when  Adam  Smith  wrote. 

There  is  reason  to  suppose  that  the  effects  of  the  tax 
imposed  by  the  United  States  government  on  distilled 
liquors  are  not  fully  comprehended  by  the  public.  To- 
bacco and  tea,  wine  and  beer,  are  used  almost  exclusively 
like  food  or  as  drink;  they  are  introduced  directly  into 
the  alimentary  system.  Distilled  spirits,  however,  are 
extremely  useful  for  innumerable  purposes.  They  are 
indispensable  in  compounding  medicines,  which  must  cer- 


200  THE  METHODS  OF  TAXATION 

tainly  be  classed  as  necessaries  rather  than  luxuries,  since 
without  them  life  would  often  be  lost;  but  they  are  also 
indispensable  in  many  of  the  arts.  In  fact  there  are 
few  substances  having  so  many  and  such  important  uses 
in  manufactures  as  alcohol.  It  is  used  as  a  fuel  for 
motors,  and  for  heating  and  cooking,  as  well  as  to  give 
light.  It  is  necessary  in  making  smokeless  powder,  in 
making  dyes,  celluloid,  lacquer,  varnishes,  and  number- 
less other  articles.  By  its  aid  cotton  can  be  so  treated 
as  to  be  a  cheap  and  acceptable  substitute  for  silk ;  and  it 
is  indispensable  in  the  processes  of  photography.  It  would 
seem  to  be  dictated  by  common  sense,  if  not  by  the  most 
elementary  political  wisdom,  that  the  government  should 
not  deliberately  repress  all  these  industries,  even  if  it  did 
nothing  to  foster  them.  For  more  than  forty  years,  how- 
ever, our  government  has  levied  a  tax  at  various  rates  on 
the  production  of  this  substance,  which  has  during  part 
of  this  time  amounted  to  nine  or  ten  hundred  per  cent  — 
sometimes  even  fourteen  or  fifteen  hundred  per  cent  — 
on  its  cost.  It  can  ordinarily  be  produced  and  sold  for 
perhaps  twenty-five  or  thirty  cents,  while  the  tax  has  of 
late  years  amounted  to  over  two  dollars  a  gallon.  In  the 
year  1907,  apparently  without  any  intelligent  purpose  of 
relieving  industry,  but  with  a  confused  notion  that  it 
might  thus  decrease  the  profits  of  the  shareholders  in  the 
Standard  Oil  Company,  Congress  adopted  the  policy  of 
other  countries,  and  remitted  the  tax  on  the  distillation 
of  alcohol,  provided  it  was  rendered  non-potable  by  adul- 
teration with  some  poisonous  substance.1 

Although  there  are,  according  to  men  competent  to  form 

1  Nearly  6,000,000  gallons  of  methylated  spirits  are  consumed  yearly 
in  England. 


TAXES  ON  EXPENSE  201 

an  opinion  on  such  matters,  good  fiscal  reasons  for  taxing 
the  production  of  spirits  rather  than  the  sale,  our  gov- 
ernments have  taxed  both.  The  general  government  com- 
pels the  payment  of  license  fees  by  all  dealers  in  alcoholic 
liquors,  and  the  states  and  municipalities  have  commonly 
adopted  a  similar  policy,  the  result  being  that  three  or 
four  taxes  are  levied  on  the  same  thing.  The  charge  for 
these  latter  licenses  is  often  very  high;  it  is  a  thousand 
dollars  a  year  in  some  cities,  and  more  than  this  in  others. 
They  are  also  very  productive  of  revenue,  and  the  re- 
quirements of  the  law,  at  least  so  far  as  the  general  gov- 
ernment is  concerned,  are  enforced  with  some  strictness. 
It  is  evident,  therefore,  that  no  fiscal  reasons  prevent  the 
government  from  obtaining  a  large  revenue  by  taxing 
potable  alcoholic  liquors  where  they  are  sold,  and  leaving 
the  production  of  alcohol  free.  "No  doubt  much  untaxed 
liquor  would  then  be  drunk,  as  much  is  drunk  now.  But 
as  it  is  now  entirely  possible  for  any  one  to  obtain  liquor 
elsewhere  than  at  the  licensed  drinking  places,  and  thus 
avoid  the  payment  of  the  tax  on  drink  sold  there,  and 
as  immense  numbers  of  people  do  not  choose  to  avoid 
taxation  in  this  manner,  it  is  clear  that  the  fiscal  advan- 
tages of  taxing  the  production  of  alcohol  have  been  ex- 
aggerated. There  is  certainly  no  pretence  to  justice  in 
taxing  every  man  who  paints  his  house  or  varnishes  his 
wagon,  because  other  men  are  prone  to  indulge  in  drink; 
especially  since  the  feasibility  of  taxing  the  latter  class 
and  exempting  the  former  is  demonstrable. 

Although  the  analysis  of  the  effects  of  taxing  the  use 
of  alcohol  should  properly  take  place  when  the  diffusion 
of  taxes  is  examined,  it  may  be  here  remarked  that  the 
excise  on  distilleries  in  this  country  has  always  been 


202  THE  METHODS  OF  TAXATION 

fruitful  of  fraud  and  corruption.  At  times  whiskey  has 
actually  been  sold  in  the  market  for  less  than  the  tax  on 
it,  and  while  the  revenue  from  this  source  is  better  col- 
lected than  formerly,  there  is  notoriously  much  illicit 
distillation.  Hundreds  of  lives  have  been  sacrificed  in 
the  attempt  to  collect  this  tax  in  the  mountainous  parts 
of  the  sounthern  states,  and  the  Commissioner  of  Internal 
Revenue  has  recently  declared  that  in  Virginia  many  of 
the  distillers  have  been  making  two  or  three  gallons  of 
whiskey  for  every  gallon  on  which  they  pay  the  tax,  and 
that  the  same  practice  goes  on  to  some  extent  in  all  the 
states  where  whiskey  is  made.  Under  the  law,  the  gauger 
employed  by  the  government  is  required  to  watch  every 
drop  of  liquor  as  it  falls  from  the  still,  to  barrel  it,  and 
place  the  barrels  in  a  storehouse  to  which  he  alone  has 
access.  But  the  law  allows  a  margin  of  twenty  per  cent 
to  the  distiller;  that  is,  the  grain  that  he  uses  being 
weighed,  the  spirits  gauged  must  be  eighty  per  cent  of  the 
maximum  quantity  that  can  be  distilled  from  grain  of 
that  kind.  It  is  the  custom,  the  commissioner  declares, 
for  the  gauger  to  withdraw  so  soon  as  he  has  gauged  the 
required  eighty  per  cent,  while  the  distiller  extracts  as 
much  more  as  he  can  for  his  own  account  Frauds  of  this 
kind  are  inseparable  from  the  practice  of  manufacturing 
under  the  supervision  of  government  employees,  and  there 
are  many  other  devices  by  which  unscrupulous  manufac- 
turers can  undersell  such  competitors  as  attempt  to  comply 
strictly  with  the  law.  It  is  impossible  to  estimate  the 
number  of  illicit  stills  in  existence,  but  hundreds  of  them 
are  detected  every  year,  and  it  is  supposed  by  some  of  the 
revenue  officers  that  there  may  be  thousands  of  them  in 
operation  even  in  the  city  of  "New  York.  Many  reputable 


TAXES  ON  EXPENSE  203 

persons  are  driven  out  of  a  business  where  the  policy  of 
the  government  exposes  them  to  competition  of  this  char- 
acter, a  violation  of  recognized  principles  of  justice  that 
has  been  already  characterized.1 

Tested  by  the  principle  that  justice  in  taxation  implies 
some  equality  of  sacrifice  on  the  part  of  individuals,  the 
English  system  of  taxing  the  expense  of  the  lower  order 
of  people,  whatever  its  theoretical  perfection,  must  be 
condemned.  !N"o  doubt  the  poorest  of  the  poor,  under  this 
system,  contribute  to  the  support  of  the  government;  but 
they  contribute  far  more  than  in  proportion  to  their  reve- 
nue. The  tax  is  obviously  much  lighter  for  a  workman 
with  no  family  than  for  one  having  a  wife  and  children 
to  support,  and  it  becomes  progressively  lighter  as  the 
remuneration  of  the  workman  increases.  The  constitu- 
ents of  the  nutrition  of  the  poor  are  substantially  identical 
with  those  of  the  food  of  the  rich.  Their  blood  is  physio- 
logically similar  to  that  of  their  fellow  creatures,  and 
they  require  the  same  elements  in  the  substances  from 
which  it  is  made.  There  is,  however,  an  infinite  variety 
in  the  qualities  of  these  substances,  reflected  in  differences 
in  price;  while  the  difficulties  in  the  way  of  imposing 
lower  duties  on  the  inferior  qualities  have  been  found 
to  be  insuperable. 

Professor  Fawcett  long  ago  observed  that  the  duty  paid 

1  The  extent  to  which  illicit  distillation  prevails  under  the  very  high 
duties  imposed  in  the  United  Kingdom  has  always  been  considerable, 
and  in  Ireland  it  was  formerly  so  great  as  to  compel  the  lowering  of  the 
tax.  The  rate  prior  to  1842  was  about  26*.  Sd.  a  gallon,  and  the  produc- 
tion taxed  about  1 1 ,000,000  or  12,000,000  gallons.  Peel  added  a  shilling 
to  the  tax  and  the  production  fell  to  5,000,000  gallons.  After  this  tax 
was  taken  off  the  quantity  gradually  rose  to  8,200,000  in  1853.  It  was 
many  years  before  an  increased  tax  was  imposed  with  better  results; 
but  there  were  1,174  seizures  of  illicit  stills,  etc.,  in  1904-05. 


204  THE  METHODS  OF  TAXATION 

on  the  tea  consumed  by  the  poor  was  three  times  as  great, 
in  proportion  to  the  value  of  the  tea,  as  the  duty  paid  on 
that  of  superior  quality,  but  that  no  method  of  applying 
an  ad  valorem  duty  had  been  found  practicable.  Nor  has 
any  such  method  been  found  very  practicable  in  the  case 
of  strong  drink ;  *  the  motives  to  supply  the  demands  of 
the  very  poor  at  the  lowest  possible  price,  as  we  have 
observed,  cause  all  manner  of  adulteration  to  be  employed, 
and  force  the  products  of  distillation  and  fermentation 
into  use  before  the  time  necessary  for  the  elimination  of 
the  most  injurious  elements  has  elapsed.  It  is  perhaps 
natural  for  one  with  no  craving  for  such  stimulants  as 
these  drinks  and  tea  and  tobacco,  or  with  the  means  to 
procure  the  finer  qualities  of  them,  to  stigmatize  them 
as  luxuries  which  the  poor,  or  at  least  the  sober  and  in- 
dustrious poor,  can  deny  themselves.  But  as  a  matter  of 
fact  it  admits  of  no  dispute  that  the  very  poor  do  not 
consider  that  they  can  deny  themselves  these  indulgences, 
and  that  the  very  heavy  taxes  laid  on  them  not  only 
enormously  increase  their  cost,  but  also  materially  impair 
their  quality. 

It  may  appear  somewhat  more  practicable  to  lay  taxes 
on  the  luxurious  consumption  of  the  rich.  To  keep  a 
footman  is  hardly  to  be  regarded  as  essential  to  healthy 
existence,  and  the  same  is  true  of  the  display  of  coats-of- 

1  On  this  subject,  Gladstone,  speaking  in  1853,  remarked:  "An- 
other plan  would  be  to  fix  a  duty  of  several  rates  on  wine  of  different 
values,  somewhat  resembling  the  duty  on  different  qualities  of  sugar. 
But  if  that  is  attended  with  difficulty  in  the  case  of  sugar,  with  how 
much  greater  difficulty  would  it  not  be  attended  in  that  of  wine  ?  .  .  . 
The  Revenue  Department  would  have  the  greatest  difficulty  in  carrying 
out  such  a  system."  Sir  W.  Harcourt  said  in  1894:  "A  gallon  repre- 
sents six  reputed  quart  bottles  of  proof  spirit,  but,  in  point  of  fact,  at 
the  strength  below  proof  at  which  spirits  are  usually  sold,  it  would 
represent  eight  bottles." 


TAXES  ON  EXPENSE  205 

arms.  So  much  cannot  be  said  of  maintaining  a  carriage. 
A  physician  might  be  unable  to  practice  without  one,  and 
they  may  be  indispensable  for  the  comfort  and  even  for 
the  existence  of  many  feeble  persons.  Public  carriages, 
indeed,  can  hardly  be  classed  as  luxuries,  either  of  the 
rich  or  of  the  poor.  The  English  government  taxes  all 
three  forms  of  expense  by  means  of  licenses.  The  number 
of  licenses  to  keep  male  servants  taken  out  is  about 
220,000,  producing  £163,000 ;  those  for  armorial  bearings 
number  about  57,000,  and  produce  nearly  £75,000.  For 
carriages  the  number  is  about  480,000,  producing  some 
£470,000,  and  for  hacks  133,000,  bringing  in  nearly 
£100,000.  Licenses  to  use  guns  and  to  kill  game  may 
be  regarded  as  taxes  on  the  luxuries  of  the  rich;  they  are 
notoriously  disregarded,  but  they  bring  in  nearly  £300,000. 
The  tax  on  hair  powder  survived  a  long  time,  but  finally 
became  too  absurd  and  too  insignificant  to  be  retained. 
More  than  half  a  century  ago  John  Bright  said  that  this 
tax  and  that  on  armorial  bearings  —  which  applies  even 
to  emblems  stamped  on  letter  paper  —  made  the  system 
ridiculous  and  ought  to  be  abolished.  Such  taxes  cause 
a  vast  amount  of  vexation  and  loss  of  time,  and  are  very 
troublesome  to  collect.  The  progressive  death-duties,  with 
the  high  income  tax,  constitute  so  heavy  a  charge  on  the 
expense  of  the  rich  as  should  entitle  them  to  relief  from 
petty  exactions. 

In  our  own  country,  taxes  on  such  things  as  are  sup- 
posed to  be  consumed  exclusively  by  the  rich  have  been 
found  to  produce  comparatively  little  revenue.  The  vari- 
ous manufactures  of  silk,  and  such  articles  as  kid  gloves, 
seem  to  be  luxuries  of  the  rich,  but  in  fact  the  great  bulk 
of  their  consumption  is  by  the  middling  class  of  people. 


206  THE  METHODS  OF  TAXATION 

The  same  is  true  of  a  great  deal  of  jewelry.  The  common 
people  of  many  countries  are  accustomed  to  preserve  their 
savings  in  the  form  of  gold  and  silver  ornaments,  and 
many  persons  in  moderate  circumstances  have  quite  large 
investments  in  precious  stones.  Gold  and  silver  watches 
may  be  regarded  as  luxuries,  but  they  are  by  no  means 
purchased  by  the  rich  alone.  They  are  very  generally 
taxable,  as  is  jewelry,  but  the  revenue  from  this  source  is 
insignificant.  The  value  of  all  the  diamonds  in  human 
possession  is  very  great,  and  it  might  seem  that  they  are 
owned  exclusively  by  the  rich.  But  although  they  are 
taxable,  like  other  personal  property,  very  little  revenue 
is  derived  from  them.  Things  of  great  value,  but  of  small 
bulk,  it  has  been  found,  cannot  be  reached  by  the  assessor. 
They  can  so  easily  be  concealed  and  removed,  and  their 
discovery  requires  such  vexatious  inquisition,  that  no  at- 
tempt to  tax  them  seems  to  have  been  attended  with  much 
success.  Taxes  of  this  kind  may  be  paid  if  they  are  light ; 
but  in  that  case  the  revenue  derived  from  them  is  com- 
paratively small.  Some  exception  may  be  made  in  the 
case  of  Champagne  wine;  it  is  occasionally  prescribed 
for  invalids,  but  its  chief  use  is  unquestionably  as  an 
ostentatious  luxury,  and  it  would  be  impossible  to  name  a 
substance  of  which  the  enhanced  price  caused  by  taxa- 
tion involves  less  sacrifice  on  the  part  of  those  who  pay 
it.  Yet  even  in  this  case,  as  there  are  many  grades  of 
champagne,  the  tax  is  heavier  on  those  that  are  cheaper 
owing  to  the  difficulty  of  assessing  ad  valorem  duties; 
and  the  same  is  true  of  fine  wines  in  general. 

The  system  by  which  the  government  of  the  United 
States  procures  its  revenue,  however,  is  constructed  with- 
out the  slightest  reference  to  either  the  proportionate  or 


TAXES  ON  EXPENSE  207 

progressive  method  of  taxation,  or  indeed  to  any  principle 
of  justice  whatever.  The  whole  revenue  of  the  govern- 
ment is  collected  without  requiring  a  single  one  of  the 
eighty  millions  of  its  subjects  to  disclose  the  amount  of 
his  income,  and  without  any  pretence  of  graduating  taxa- 
tion according  to  expense.  Hence  it  is  altogether  a  matter 
of  chance  whether  the  national  system  lessens  or  aggra- 
vates the  inequalities  caused  by  the  systems  of  the  states ; 
nor  do  the  numerous  specific  taxes  of  the  states  appear 
to  be  much  more  certain  in  their  incidence.  The  authors 
of  these  systems  have  seldom  claimed  to  have  had  the 
equalization  of  the  burdens  of  individual  citizens  in  view, 
nor  to  have  even  conceived  it  to  be  a  desirable  end;  and 
the  discussions  of  these  problems,  which  have  exercised 
the  talents  of  the  most  enlightened  English  statesmen  and 
illuminated  the  debates  in  Parliament  with  the  generous 
utterances  of  philanthropic  wisdom,  have  found  little  place 
in  the  records  of  our  legislatures. 

In  explanation  of  this  apparent  indifference,  it  may  be 
said  that  our  rulers  have  wisely  refrained  from  attempt- 
ing what  they  knew  they  were  incapable  of  achieving ;  but 
the  principal  reason  is  obviously  to  be  found  in  the  preva- 
lence of  the  protective  theory  of  taxation.  It  is  the  aim 
of  this  theory  to  give  the  producers  of  certain  goods  an 
advantage  in  selling  them,  by  taxing  like  goods  produced 
by  foreigners  when  imported  into  this  country.  When 
this  is  the  aim  of  legislation,  it  is  inevitable  that  number- 
less clashing  interests  must  be  somehow  harmonized  be- 
fore any  measure  can  be  adopted,  a  process  which  takes 
place  without  any  occasion  to  appeal  to  any  controlling 
or  unifying  principle  of  economical  or  ethical  science.  It 
is  of  course  impossible  to  adopt  the  practice  of  the  Eng- 


208  THE  METHODS  OF  TAXATION 

lish  government  in  imposing  taxes,  so  far  as  may  be,  only 
on  things  fitted  for  final  and  immediate  consumption;  the 
theory  on  which  the  practice  is  framed  being  that  a  tax 
paid  on  what  are  called  raw  materials  requires  the  use 
of  a  part  of  a  manufacturer's  capital,  and  is  regarded  by 
him  as  an  element  in  the  cost  of  production.  On  this  part 
of  his  capital  he  expects  to  obtain  the  same  profit  as  on 
the  rest,  and  the  price  is  correspondingly  increased  to 
every  subsequent  purchaser.  But  where  the  policy  of 
protection  is  adopted,  the  producers  of  raw  materials  natu- 
rally decline  to  tolerate  such  measures.  The  woolgrowers 
must  be  protected  by  a  tax  on  unsecured  wool  or  they 
will  overthrow  the  whole  tariff;  there  must  then  be  a 
higher  tax  on  scoured  wool  to  protect  the  wool  cleaner, 
a  still  higher  tax  on  yarns  to  protect  the  spinner,  another 
on  cloth  for  the  weaver,  and  a  final  one  for  the  benefit 
of  the  maker  of  clothing.  Under  such  conditions  no  at- 
tempt to  adjust  taxation  with  reference  to  the  burden 
imposed  on  the  poor  can  possibly  be  successful. 

It  may  be  added  that  in  one  of  the  few  cases  where  our 
government  has  imposed  a  customs  duty  for  the  purposes 
of  revenue  only,  as  when  a  tax  on  tea  was  levied  by  the 
act  of  1898,  the  duty  was  intentionally  so  graduated  as 
to  fall  with  the  greatest  severity  on  the  kinds  of  tea  con- 
sumed by  the  very  poor.  The  sacrifices  of  these  persons 
were  deliberately  made  greater  than  those  of  the  well- 
to-do.  The  tax  on  imported  sugar,  as  has  been  observed, 
also  falls  heavier  on  the  poor  than  on  the  rich.  The 
consumption  of  this  substance  does  not  increase  very 
greatly  when  the  income  of  the  consumer  increases,  and 
certainly  not  in  proportion  to  that  increase.  Very  rich 
men  will  employ  many  servants,  and  in  their  households 


TAXES  ON  EXPENSE  209 

there  will  be  much  extravagance  in  the  use  of  sugar,  as 
in  the  use  of  other  things;  but  the  cost  of  sugar,  and 
therefore  that  part  of  the  cost  which  is  due  to  the  tax 
on  it,  will  constitute  a  much  smaller  part  of  their  ex- 
penditure, or  of  their  income,  than  in  case  of  the  poor. 
Whether  we  attach  any  importance  to  the  doctrine  of 
economic  classes  or  not,  it  is  at  least  true  that  the  taxes 
imposed  by  our  national  government  appear  to  fall  on  the 
expense  of  the  common  people  to  a  much  greater  degree 
than  on  that  of  the  rich. 

Taxes  on  expense  fall  into  the  class  called  indirect ;  and 
indirect  taxes  have  always  been  regarded  with  high  favor 
by  governments.  The  reason  for  this  is  frankly  avowed; 
it  is  because  under  this  system  subjects  are  not  aware  how 
heavily  they  are  taxed.  The  distinction  made  in  the  Con- 
stitution of  the  United  States  between  direct  and  indirect 
taxes  has  given  rise  to  much  legal  casuistry,  and  writers  on 
economics  have  not  all  agreed  in  their  definitions  of  these 
terms.  For  the  purpose  of  this  inquiry,  however,  it  is  only 
necessary  to  observe  that  every  tax,  whether  assessed  on  per- 
sons or  property,  is  paid  by  some  person  to  the  tax-gatherer. 
If  it  actually  reduces  the  revenue  of  that  person  and  no 
other,  it  is  properly  called  a  direct  tax.  If  it  reduces  the 
revenue  of  persons  who  do  not  pay  it  to  the  tax-gatherer, 
it  is  an  indirect  tax.  This  reduction  is  invariably  effected 
through  the  payment  of  an  enhanced  price  for  things 
bought,  which  enhanced  price  reimburses  the  person  who 
paid  the  tax  in  the  first  place.  If  the  purchaser  resells  the 
thing,  he  may  in  turn  reimburse  himself;  but  there  must 
always  be  a  final  purchaser,  who  does  not  resell  the  thing, 
but  consumes  it.  As  the  extent  to  which  the  price  of  the 
thing  has  been  enhanced  in  this  process  must  always  be  a 

14 


210  THE  METHODS  OF  TAXATION 

matter  of  conjecture,  and  as  the  great  mass  of  the  people 
are  ignorant  that  it  has  been  advanced  at  all,  the  tempta- 
tion to  rulers  to  resort  to  indirect  taxation  is  of  course  very 
great. 

We  shall  return  to  this  subject  when  the  diffusion  of 
taxes  is  taken  up,  and  it  is  considered  here  only  because 
that  feature  in  indirect  taxation  which  recommends  it  to 
rulers  is  totally  repugnant  to  accepted  principles  of  justice. 
To  deceive  subjects  concerning  the  extent  of  their  burdens 
may  perhaps  be  just  from  the  point  of  view  of  a  despot  or 
an  oligarchy;  but  there  can  be  no  pretence  whatever  that 
it  is  just  for  rulers  chosen  by  the  people  to  deceive  their 
constituents.  Indirect  taxes,  therefore,  can  be  defended  in 
a  republic  only  on  the  ground  of  necessity.  They  may  be 
believed  to  be  indispensable ;  they  can  never  be  maintained 
to  be  just.  Pitt's  celebrated  denunciation  of  them  was 
none  too  severe. 

!N"o  particular  reference  has  hitherto  been  made  to  what 
is  on  many  accounts  the  most  important  of  all  taxes  on 
the  indicia  of  income,  that  on  dwelling-houses,  although 
it  is  true  that  under  the  general  property  tax  houses  are 
assessed;  and  in  England,  in  addition  to  the  rates,  there 
is  an  inhabited  house  duty.  Taxes  of  this  kind,  however, 
are  so  peculiar  in  their  nature,  and  involve  especially  so 
much  reference  to  the  law  of  diffusion,  as  to  make  it 
desirable  to  consider  them  separately,  and  they  will  ac- 
cordingly be  reserved  for  treatment  by  themselves. 


CHAPTER  VII 

TAXES  ON  TRANSFERS  OF  PROPERTY  AT  DEATH 

THE  taxes  imposed  on  property,  the  title  to  which,  or  the 
possession  or  enjoyment  of  which,  is  transferred  to  others 
at  the  death  of  the  owner,  are  known  by  several  names.  As 
property  may  be  transferred  in  accordance  with  the  will 
of  a  testator,  a  tax  then  imposed  is  properly  enough  de- 
scribed as  a  legacy  tax  or  duty.  When  it  is  transferred 
from  an  intestate  according  to  the  laws  defining  the  heirs 
and  next  of  kin  of  a  decedent,  the  tax  may  be  called  an 
inheritance  or  succession  tax  or  duty.  As  the  estates  of 
decedents  are  usually  administered  under  the  jurisdiction 
of  what  may  be  generically  described  as  Probate  Courts, 
the  taxes  imposed  may  be  called  probate  taxes  or  duties. 
All  these  taxes  or  duties  are  sometimes  denominated  trans- 
fer taxes ;  but  loosely,  for  many  other  transfers  are  taxable. 
As  the  termination  of  the  life  of  the  owner  is  the  essential 
fact,  a  tax  then  imposed  is  most  accurately  named  a  death- 
duty,  or  death-tax;  and  this  name  is  also  preferable  be- 
cause of  its  brevity.  The  name  "  duty  "  is  more  commonly 
employed  in  England ;  but  in  the  United  States  this  word 
is  usually  understood  to  mean  a  tax  on  imported  goods,  and 
it  seems  better  to  confine  it  to  that  use. 

It  has  been  perhaps  sufficiently  established  that  neither 
the  proportionate  nor  the  progressive  method  can  be  ap- 
plied unless  the  tax-gatherer  can  ascertain  the  quantity  of 
wealth  or  income  belonging  to  or  enjoyed  by  every  person. 
Experience  seems  to  prove  conclusively  that  such  knowledge 


212  THE  METHODS  OF  TAXATION 

cannot  in  practice  be  obtained,  and  that  the  attempt  to 
obtain  it  inevitably  results  in  the  gross  violation  of  ad- 
mitted principles  of  justice.  The  conclusion  is  strength- 
ened by  the  obvious  fact  that  immense  numbers  of  married 
women  and  children  never  come  within  the  purview  of  the 
tax-gatherer  at  all ;  taxes  on  the  goods  that  they  consume 
not  conforming  to  either  of  the  methods  under  examination. 
Yet  the  very  abandoning  the  attempt  to  tax  proportionately 
this  great  number  of  persons,  seems  to  apply  in  a  way  the 
progressive  method.  For  it  may  be  presumed  that  infants, 
and  to  a  considerable  extent  married  women,  possess  com- 
paratively little  wealth,  and  whatever  exemption  they  en- 
joy would  appear  to  be  in  harmony  with  that  principle  of 
justice  on  which  the  progressive  method  is  based.  Nor  does 
it  seem  unreasonable  to  suppose  that  nearly  all  persons  who 
do  not  own  the  houses  in  which  they  dwell,  and  who  support 
themselves  by  laboring  for  wages,  are  possessed  of  but  a 
moderate  amount  of  property.  If  then  we  can  exempt  this 
large  class  from  taxation,  and  cause  it  to  fall  upon  those 
who  have  great  possessions,  we  have  to  a  certain  degree 
applied  the  progressive  method.  Graduated  taxation  of 
this  kind  is  often  called  degressive,  as  being  intended  to 
lighten  the  burden  of  those  relatively  poor. 

The  problem,  it  is  true,  cannot  be  said  to  be  completely 
solved  by  ignoring  its  most  troublesome  elements.  Even 
if  we  may  assume  it  to  be  practicable  to  separate  the  poor 
from  the  rich,  when  we  attempt  to  impose  taxes  on  the 
latter  the  difficulty  encountered  in  applying  the  general 
property  tax  reappears.  All  attempts  to  levy  this  tax, 
and  all  attempts  to  levy  an  income  tax,  as  they  require  the 
discovery  or  disclosure  of  the  wealth  of  every  individual, 
are  irreconcilable  with  our  admitted  standards  of  justice. 


TRANSFERS  OF  PROPERTY  AT  DEATH  213 

As  between  the  two  great  classes  of  the  rich  and  the  poor, 
we  may,  after  a  fashion,  apply  the  progressive  principle; 
but  as  between  the  individuals  constituting  the  class  of  the 
rich,  this  seems  impossible. 

It  is  therefore  on  the  principle  of  recognizing  the  classes 
of  rich  men  and  poor  men  that  death  taxes  are  declared 
just  by  the  advocates  of  the  progressive  method.  As  no 
man  can  carry  his  possessions  with  him  out  of  this  world, 
the  title  to  his  wealth  must  somehow  be  transferred  at  his 
death  to  some  living  person;  and  in  our  country  this  is 
usually,  and  when  estates  are  large,  perhaps  almost  always, 
accomplished  through  the  Probate  Courts.  Such  proceed- 
ings necessarily  imply  the  taking  of  an  inventory  and  the 
making  of  an  appraisal  of  the  property  of  the  decedent, 
and  in  this  way  the  method  of  inspection  can  be  very  effec- 
tively employed.  As  we  have  seen,  the  assessment  of  prop- 
erty during  the  life  of  the  owner  is  very  slight  evidence  of 
its  value ;  but  its  appraisal  after  his  death  is  good  evidence, 
perhaps  as  good  as  can  possibly  be  obtained.  The  tempta- 
tion to  conceal  wealth  is  much  less,  the  difficulty  of  con- 
cealment much  greater ;  and  in  the  case  of  many  of  the  evi- 
dences of  indebtedness  known  in  general  as  securities  — 
the  form  of  property  that  is  most  commonly  concealed  while 
the  owner  lives  —  title  cannot  be  transferred  without  the 
authority  of  the  court  and  the  attendant  publicity.  We 
may  conclude,  therefore,  that  the  value  of  all  property 
administered  through  the  court  may  be  quite  accurately 
known,  and  it  would  seem  to  follow  that  the  progressive 
method  could  be  successfully  applied. 

But  before  this  conclusion  is  accepted  we  need  to  ascer- 
tain more  precisely  the  effect  of  death  taxes,  and  we  shall 
be  aided  in  this  inquiry  by  examining  the  arguments  em- 


214  THE  METHODS  OF  TAXATION 

ployed  in  discussing  the  subject.  Some  writers  have  as- 
serted that  such  taxes  are  in  the  nature  of  a  charge  for  the 
services  rendered  by  the  government  in  securing  the  trans- 
fer of  the  wealth  of  the  dead  to  such  persons  as  are  entitled 
to  it.  No  doubt  moderate  probate  costs  could  be  justified 
on  this  ground,  but  their  amount  would  be  too  small  to  be 
of  importance,  and  their  effect  in  redressing  inequality  in 
the  distribution  of  wealth  inappreciable.  Furthermore, 
we  find  that,  in  all  laws  imposing  such  taxes,  transfers  of 
property  effected  by  deeds  of  trust,  which  may  be  carried 
out  without  the  aid  of  the  Probate  Court,  are  subjected  to 
taxation.  It  is  evident  that  the  legislature  considers  that 
otherwise  men  would  dispense  with  the  assistance  of  gov- 
ernment officers,  and  accomplish  such  transfers  as  they 
desire  by  other  means.  In  fact,  lawyers  know  very  well 
that  a  transfer  of  property  to  take  effect  on  the  death  of  a 
certain  person  requires  the  aid  of  the  government,  unless 
the  legislature  interposes,  no  more  than  a  transfer  taking 
effect  on  any  other  future  contingency.  The  claim  that 
death  taxes  are  a  charge  for  services  rendered  by  govern- 
ment seems  therefore  inadmissible.1  It  seems  to  be  com- 
pletely disposed  of  by  the  fact  that  the  English  statute  is 
retroactive,  and  treats  a  gift  made  within  a  year  of  death 
as  an  evasion  of  the  tax,  unless  the  giver  absolutely  divests 
himself  of  all  beneficial  interest  in  the  property. 

1  In  England  property  was  formerly  administered  through  the 
Probate  Courts  to  a  much  smaller  extent  than  in  this  country.  Landed 
property,  especially,  did  not  pass  by  will;  the  title  to  great  estates 
being  transmitted  through  those  peculiar  trust  deeds  known  as  settle- 
ments. But  the  later  returns  of  the  death  duties  show  that  compara- 
tively little  personalty  is  settled,  and  that  landed  property  is,  relatively, 
much  diminished  in  value;  although  much  more  of  it  than  of  person- 
alty is  settled.  The  law  of  primogeniture,  it  may  be  added,  applying 
only  where  there  is  no  will  or  settlement,  is  very  far  from  having  the 
importance  sometimes  attached  to  it  by  writers  in  this  country. 


TRANSFERS  OF  PROPERTY  AT  DEATH   215 

A  more  subtle  suggestion  has  been  made,  and  almost 
universally  adopted  by  the  courts,  to  the  effect  that  no 
right  exists  in  any  living  person  to  take  the  property  of  a 
decedent,  except  such  a  right  as  is  conferred  by  statute. 
This  proposition  rests  substantially  on  a  restricted  view 
of  the  doctrine  of  natural  rights ;  it  being  asserted  that  no 
one  has  a  natural  right  to  succeed  to  the  ownership  of 
wealth  on  the  death  of  its  possessor,  while  he  has  a  natural 
right  to  obtain  such  ownership  during  the  possessor's  life. 
We  have  already  considered  the  uses  of  the  term  "  natural," 
and  it  is  unnecessary  to  review  the  discussion.  We  are 
concerned  not  with  what  the  courts  declare  to  be  the  law, 
but  with  what  men  hold  to  be  just;  and,  upon  reflection, 
we  find  that  no  principles  of  justice  other  than  those  already 
recognized  are  applicable  in  this  case.  So  far  as  common 
usage  is  concerned,  it  cannot  be  denied  that  men  speak  of 
the  natural  right  of  widows  and  children  to  retain  the 
house  and  goods,  title  to  which  was  vested  in  the  dead 
father,  but  the  acquisition  of  which  may  have  been  ac- 
complished through  the  combined  labors  of  all  the  members 
of  the  family.  Historically,  as  we  have  seen,  family, 
rather  than  individual,  ownership  prevailed  in  early  times, 
and  if  we  use  the  term  "  natural  "  as  meaning  what  has 
been  customary,  it  can  hardly  be  denied  that  the  surviving 
members  of  a  family  have  a  natural  right  of  inheritance. 
Nor,  within  certain  limits,  does  the  result  seem  different 
if  the  term  is  used  in  the  sense  of  what  ought  justly  to  be ; 
for  it  seems  impossible  to  disregard  the  claims  of  widows 
and  children. 

In  order  to  maintain  a  position  which  has  not  seemed 
very  defensible,  legally,  to  many  of  the  profession,  the 
courts  have  resorted  to  an  even  more  subtle  distinction.  A 


216  THE  METHODS  OF  TAXATION 

tax  on  the  transfer  of  property,  it  is  said,  is  not  a  tax  on  the 
property  itself;  and  in  the  case  of  bonds  of  the  United 
States,  which  are  by  their  terms  exempt  from  taxation  in 
any  form  by  other  authorities,  and  from  the  payment  of  all 
taxes  or  duties  of  the  United  States,  it  has  been  actually 
held  legal  for  state  legislatures  to  tax  banks  and  similar 
institutions  according  to  their  holdings  of  such  bonds,  and 
they  have  been  declared  to  be  taxable  by  the  United  States 
on  the  death  of  their  owner.1 

But,  although  this  distinction  is  established  by  law,  it 
seems  impossible  to  maintain  it  upon  ethical  grounds,  and 
it  finds  no  support  in  experience.  When  one  buys  some- 
thing in  reliance  on  the  promise  of  the  seller  that  it  shall 
be  exempt  from  taxation  in  any  form,  he  unquestionably 
considers  that  he  has  been  defrauded  when  he  finds  that  he 
cannot  transfer  the  thing  without  its  being  subjected  to  a 
tax.  It  admits  of  no  question  that  when  two  things  other- 
wise of  equal  value  are  offered  in  the  market,  one  of  which 
can  be  transferred  freely,  while  the  other  can  be  trans- 
ferred only  at  some  expense,  the  former  will  command  the 
higher  price.  In  actual  bargaining,  the  circumstance  that 

1  "Taxes  of  this  general  character  are  universally  deemed  to  relate, 
not  to  property  eo  nomine,  but  to  its  passage  by  will  or  by  descent  in 
cases  of  intestacy,  as  distinguished  from  taxes  imposed  on  property, 
real  or  personal  as  such,  because  of  its  ownership  and  possession." 
Knowlton  v.  Moore,  U.  S.  S.  C.  Rep.  178.  In  the  course  of  the  opinion 
it  is  to  be  noted  that  the  Court  uses  words  in  their  usual  sense,  "The 
same  person,"  it  is  remarked,  "taking  equal  legacies  from  different 
persons,  would  pay,"  etc.  So  too  a  legacy  tax  is  spoken  of  as  affecting 
the  "taxation  of  the  property  of  one  person,"  etc.  It  may  be  remarked 
that  this  Court  has  held  that  a  tax  on  the  occupation  of  an  importer  is 
the  same  as  a  tax  on  imports ;  that  a  tax  on  the  income  of  United 
States  bonds  is  a  tax  on  the  bonds ;  that  a  tax  on  a  bill  of  lading  is  a  tax 
on  the  goods;  that  a  tax  on  sales  made  by  auction  is  a  tax  on  the  things 
sold ;  that  a  tax  on  rents  is  a  tax  on  real  estate ;  and  in  general  that  to 
tax  the  use  of  property  is  to  tax  the  property  whose  only  value  consists 
in  its  usefulness. 


TRANSFERS  OF  PROPERTY  AT  DEATH   217 

the  expense  of  effecting  a  transfer  is  declared  not  to  be  a 
tax  on  property  eo  nomine,  but  upon  the  transaction,  is 
perfectly  immaterial.  For  all  practical  purposes,  a  tax  on 
the  transfer  of  a  thing  is  a  tax  on  the  thing ;  and  in  fact 
the  law  makes  the  tax  on  the  transfer  a  lien  on  the  thing. 
It  will  scarcely  be  contended  that  property  subject  to  lien 
is  so  valuable  as  if  it  were  free ;  and  no  one  would  venture 
to  maintain  the  proposition  that  a  government  bond  that 
may  be  subjected  to  taxation  to  an  indefinite  amount  when 
it  is  transferred,  could  be  sold  for  so  much  as  one  that 
should  be  really  as  well  as  nominally  exempt  from  taxation 
in  every  form.  Under  the  general  property  tax,  intangible 
personal  property  is  in  practice  so  commonly  exempt  as  to 
make  it  comparatively  immaterial  whether  a  bond  is  by 
its  terms  free  from  taxation  or  not ;  but  this  is  because  the 
ordinary  buyer  does  not  expect  to  pay  the  tax,  and  there- 
fore ignores  it.  Did  he  believe  that  he  would  be  obliged 
to  pay  it,  he  would  give  the  preference  to  non-taxable 
bonds. 

It  seems,  therefore,  that  death  taxes  cannot  be  justified 
on  the  ground  that  a  legal  distinction  has  been  made  be- 
tween taxing  property  and  taxing  the  transfer  of  property. 
Value  means  ordinarily  value  in  exchange;  and  it  is  les- 
sened by  whatever  hinders  exchange.  It  is  true  that  a 
transfer  at  death  appears  to  differ  from  ordinary  barter; 
one  party  is  not  in  position  to  receive  the  consideration  for 
the  transfer.  But  it  frequently  happens  that  the  consider- 
ation has  been  already  received ;  the  decedent  has  received 
value  in  the  shape  of  services,  or  in  substantial  goods,  for 
which  he  pays  by  means  of  a  legacy.  Frequently,  also, 
the  property  standing  in  the  name  of  the  decedent,  is,  as 
we  have  seen,  family  property,  and  the  transfer  of  title  at 
his  death  amounts  to  no  more  than  a  declaration  of  the 


218  THE  METHODS  OF  TAXATION 

values  of  the  several  interests.  Moreover,  no  consideration 
passes  when  a  living  person  makes  a  gift  to  another;  the 
transaction  is  essentially  no  more  an  exchange  than  in  the 
case  of  a  legacy.  Since  a  valuable  consideration  fre- 
quently exists  for  a  transfer  after  death,  and  since  it  fre- 
quently does  not  exist  when  the  transfer  is  between  living 
persons,  its  absence  cannot  be  regarded  as  constituting  the 
justification  of  death  taxes. 

Nor  does  the  fact  that  the  estate  possessed  at  the  moment 
of  death  is  large  appear  to  justify  such  taxation.  For,  as 
we  have  seen,  it  is  thought  just  that  those  who  render  great 
services  should  be  liberally  compensated;  and,  in  spite  of 
popular  clamor,  we  must  hold  that  the  community  is  often 
benefited  through  the  acquisition  of  wealth,  even  in  large 
amounts.  The  wealth  may  have  been  fairly  earned  by 
great  services,  it  may  have  been  employed  in  enterprises 
profitable  to  the  community,  it  may  have  supported  schools 
and  hospitals,  and  it  may  be  intended  for  such  uses  after 
the  death  of  the  possessor.  In  such  cases  neither  the  acqui- 
sition nor  the  expenditure  of  wealth  can  be  regarded  as 
unfavorable  to  that  equality  of  opportunity  which  justice 
demands,  and  there  is  certainly  no  presumption  that  if 
great  wealth  is  seized  by  the  rulers  it  will  be  expended  by 
them  so  as  better  to  promote  such  equality.  Even  if  lega- 
cies for  charitable  purposes  are  exempted,  we  cannot  be 
sure  that  they  will  not  be  diminished  if  death  taxes  are 
levied  on  other  legacies;  and  we  know  that  in  countries 
where  such  taxes  have  long  existed  the  endowment  of  public 
institutions  by  private  persons  does  not  prevail  as  it  has 
hitherto  prevailed  in  this  country.  It  is  quite  conceivable 
that  the  present  total  of  charitable  bequests  might  be  de- 
creased by  the  whole  amount  of  the  death  taxes ;  in  which 


TRANSFERS  OF  PROPERTY  AT  DEATH   219 

case  the  interests  of  the  community  might  suffer,  unless  in 
the  improbable  event  that  all  the  proceeds  of  such  taxation 
should  be  applied  to  charitable  uses.  When  the  possessor 
of  five  millions  knows  that  the  government  will  seize  one- 
fifth  of  his  estate  on  his  death,  he  will  presumptively  not 
make  the  same  disposition  of  his  property  as  he  would  in 
the  absence  of  such  taxation.  If  he  had  proposed  to  apply 
a  million  to  charity,  he  may  reason  that  as  the  government 
has  taken  that  sum  from  him,  he  is  relieved  from  whatever 
obligation  he  had  felt  to  the  community. 

These  illustrations  are  from  cases  where  great  wealth  has 
been  well  acquired  and  well  administered ;  but  many  men 
get  rich  by  iniquitous  methods  and  there  seems  to  be  a 
confused  feeling  that  they  are  somehow  punished  and  that 
justice  is  thereby  attained  when  a  part  of  their  wealth  is 
confiscated  after  they  can  no  longer  enjoy  it.  No  doubt  it 
is  true  that  the  anticipation  of  such  a  result  is  painful ;  the 
pleasure  of  the  possession  of  great  wealth  must  be  dimin- 
ished by  the  knowledge  that  it  cannot  be  disposed  of  ac- 
cording to  the  will  of  the  possessor.  But  it  is  extremely 
doubtful  if  punishment  of  this  kind  is  efficacious  as  a  de- 
terrent. Unscrupulous  men  are  not  apt  to  be  prevented 
from  taking  unfair  advantage  of  their  neighbors  by  the 
reflection  that  after  they  are  dead  their  estates  will  be 
heavily  taxed;  they  do  not  hesitate  to  face  much  greater 
risks  than  this.  And  perhaps  we  might  fairly  reason  from 
historical  example  that  such  men  are  peculiarly  apt  to 
compound  for  their  sinful  practices  in  this  life  by  liberal 
gifts  to  charitable  purposes  after  they  die,  and  that  they 
may  feel  that  absolution  will  be  sufficiently  secured  through 
payment  of  death  taxes.  Our  knowledge  of  the  motives 
that  will  become  operative  in  such  circumstances  is  really 


220  THE  METHODS  OF  TAXATION 

so  imperfect  as  to  make  our  conclusions  very  uncertain; 
still  we  know  that  it  is  customary  in  England  to  effect 
insurance  against  the  damage  to  estates  caused  by  the  death 
duties,  just  as  it  is  customary  to  insure  buildings  against 
damage  caused  by  fire,  and  we  may  safely  infer  that  their 
effect  cannot  usually  be  to  arouse  in  those  who  pay  them 
an  inclination  to  confer  benefits  on  the  society  that  exacts 
them.  It  seems  on  the  whole  probable  that  when  such 
taxes  prevail,  the  quantity  of  wealth  left  by  decedents  to 
charitable  uses  may  be  considerably  decreased,  and  that 
to  a  certain  extent  the  intended  removal  of  inequality  may 
therefore  not  be  attained. 

We  have  hitherto  regarded  chiefly  the  effect  of  these 
taxes  on  those  who  leave  property ;  but  it  seems  rather  that 
the  real  sufferers  are  those  who  take  the  property  dimin- 
ished by  taxation.  The  decedent  may  have  been  aggrieved 
that  his  will  should  be  thwarted;  but  the  survivors  are 
actually  deprived  of  wealth  that  they  would  otherwise  have 
enjoyed.  Our  proper  inquiry,  therefore,  is  concerning  the 
justice  of  such  deprivation.  Now  when  the  estate  left  by 
the  head  of  a  family  is  small,  it  is  ordinarily  a  cruel  injus- 
tice to  diminish  the  amounts  that  would  naturally  go  to 
the  widow  and  children.  In  most  cases  the  father  was  pre- 
sumptively supporting  the  family,  and  his  death  must 
seriously  decrease  their  income;  while  the  cost  of  an  ill- 
ness, perhaps  prolonged  for  months  or  years,  and  the 
funeral  expenses,  often  constitute  a  crushing  burden.  For 
the  government  to  increase  this  burden  seems  wholly  irrec- 
oncilable with  any  admitted  principle  of  justice,  and 
notoriously  arouses  the  bitterest  indignation  on  the  part 
of  the  sufferers.  In  the  case  of  small  estates,  therefore, 
taxes  imposed  on  widows  and  lineal  descendants  may  be 


TRANSFERS  OF  PROPERTY  AT  DEATH  221 

condemned  without  qualification ;  and  in  such  case  it  must 
frequently  be  unjust  to  tax  legacies.1 

The  progressive  method,  however,  should  exempt  small 
estates  from  taxation;  and,  if  consistently  applied,  it 
would  seem  properly  to  exempt  small  legacies,  whether 
derived  from  small  or  large  estates.  For  its  principle  is 
that  the  possession  of  a  great  amount  of  wealth  by  one  who 
has  done  nothing  to  earn  it  is  unjust.  It  may  often  be  the 
case  that  the  recipient  of  a  moderate  bequest  has  done  some- 
thing to  earn  it,  and  to  avoid  injustice  it  seems  necessary 
to  exempt  all  such  recipients.  It  can  perhaps  seldom  be 
the  case  that  the  recipient  of  a  very  large  bequest  has  ren- 
dered any  equivalent  service,  and  the  taxation  of  such 
bequests  is,  theoretically  at  least,  justifiable.  Mill,  indeed, 
proposed  to  limit  the  amount  that  any  person  should  ac- 
quire in  this  way ;  but  in  'our  federal  state  such  a  restric- 
tion would  hardly  be  practicable.  It  must  be  added  that, 
in  the  case  of  very  large  estates,  to  tax  moderately  the 
shares  of  widows  and  children  can  cause  them  no  great 
distress.  They  may  be  compelled  to  live  more  modestly, 
but  they  will  usually  be  deprived  of  nothing  essential  to 
their  welfare.  Death  taxes,  therefore,  restricted  in  the 
manner  above  indicated,  seem  adapted  to  the  application 
of  the  progressive  method ;  and,  if  we  regard  the  commun- 
ity as  consisting  of  two  classes  of  persons,  the  rich  and  the 
poor,  they  appear  to  satisfy  the  requirements  of  justice  as 
between  these  classes. 

1  "The  death  of  a  father,  to  such  of  his  children  as  live  in  the  same 
house  with  him,  is  seldom  attended  with  any  increase,  and  frequently 
with  a  considerable  diminution  of  revenue;  by  the  loss  of  his  industry, 
of  his  office,  or  of  some  life-rent  estate,  of  which  he  may  have  been  in 
possession.  The  tax  would  be  cruel  and  oppressive  which  aggravated 
their  loss  by  taking  from  them  any  part  of  his  succession."  A.  SMITH, 
Wealth  of  Nations,  Book  V,  Chap.  II,  Art.  II,  Appendix. 


222  THE  METHODS  OF  TAXATION 

As  between  the  individuals  forming  the  class  of  the  rich, 
this  is  less  true.  The  circumstances  of  two  persons,  each 
of  whom  receives  a  legacy  of  the  same  amount,  can  never  be 
quite  the  same,  and  must  often  be  extremely  different.  But 
the  tax-gatherer  cannot  inquire  whether  the  legatee  is 
young  or  old,  male  or  female,  feeble  or  vigorous,  competent 
or  incompetent,  or  even  comparatively  rich  or  poor.  Some 
distinction  may  be  recognized  between  relatives  and 
strangers  in  blood;  but  the  sole  important  differentia  is 
the  magnitude  of  the  legacy.  And  it  is  to  be  considered 
that,  in  the  case  of  large  estates,  it  is  often  practicable  for 
the  owner  to  accomplish  during  his  lifetime  those  private 
benefactions  which  men  are  perhaps  usually  prone  to  ne- 
glect until  death  forbids  longer  postponement. 

Such  beneficence  during  life  might,  it  is  true,  some- 
times diminish  the  accumulation  of  wealth;  and  it  has 
been  maintained  that  the  English  death  duties  have  this 
effect.  This  objection,  however,  is  properly  one  to  the 
amount  of  the  tax  rather  than  to  its  nature.  The  very  high 
English  death  duties  have  been  only  recently  imposed,  and 
we  must  wait  a  generation  before  we  can  form  a  conclusion 
as  to  the  various  effects  which  they  will  produce.  For  the 
same  reason  we  are  at  present  unable  to  judge  how  far  such 
taxes  may  operate  to  discourage  prudent  and  sagacious  men 
from  venturing  on  undertakings  which  may  promise  to  be 
highly  advantageous  to  the  community  as  well  as  to  them- 
selves, but  which  require  much  time  for  their  completion. 
The  possibility  of  death  is  in  itself  a  deterrent  that  we 
know  to  be  frequently  operative,  and  the  certainty  that 
death  will  involve  a  serious  diminution  of  property  can- 
not be  without  effect.  Sometimes,  too,  the  disposition  to 
spend  during  life  may  be  intensified  by  the  knowledge  that 


TRANSFERS  OF  PROPERTY  AT  DEATH   223 

much  of  what  is  not  spent  will  be  appropriated  by  the 
officers  of  government. 

As  has  often  been  remarked,  taxes  of  this  kind  are  "  un- 
thrifty "  taxes ;  they  must  ordinarily  be  paid  out  of  the 
capital  of  a  country,  rather  than  out  of  its  income.  It  may 
sometimes  happen  that  the  legatee  is  already  rich,  and  may 
be  able  to  pay  the  tax  out  of  the  income  from  property 
already  owned;  but  this  would  not  usually  be  true.  On 
the  other  hand,  the  legatee  may  be  disposed  to  repair  the 
damage  to  his  estate  by  reducing  his  expenditure  for  some 
years,  and  applying  his  savings  to  the  increase  of  his  prin- 
cipal. But  such  savings  may  be  offset  by  a  succession  of 
deaths  that  cause  the  tax  to  be  repeated  a  number  of  times 
within  a  few  years,  with  the  effect,  possibly,  of  confiscating 
half  the  value  of  the  estate.1  Very  great  inequality  of  sac- 
rifice may  thus  be  occasioned,  and  the  English  statute  makes 
some  allowance  for  the  distress  produced  by  this  injustice; 
but,  as  we  have  pointed  out,  there  is  little  pretence  that 
death  taxes  are  levied  so  as  to  cause  equality  of  sacrifice 
among  those  who  pay  them.  Their  avowed  purpose  is  to 
impose  exceptionally  heavy  burdens  on  the  rich,  in  order 
to  exempt  the  poor;  and,  in  a  community  where  the  major- 
ity rules,  such  a  policy  may  seem  so  imperatively  demanded 
by  justice,  as  to  cause  the  injustice  of  taxing  rich  people 
unequally  to  be  regarded  with  comparative  indifference. 

1  In  the  debate  on  the  budget  of  1853,  Sir  J.  Trollope  mentioned  a 
case  where  there  had  been  only  one  succession  to  an  estate  since  1756. 
On  the  other  hand,  he  said,  he  knew  of  a  family  where  there  had  been 
seven  successions  within  sixty-six  years,  and  in  four  cases  these  suc- 
cessions took  place  within  one  year  of  each  other.  In  a  recent  instance, 
within  four  days  after  a  very  heavy  tax  had  become  due,  another  of 
nearly  equal  size  followed.  Another  eminent  conveyancer  stated  that 
he  had  found  in  his  practice  that  the  average  interval  between  succes- 
sions was  about  twenty  years.  The  average  age  of  successors  seems  to 
be  about  forty-four  years. 


224  THE  METHODS  OF  TAXATION 

Still,  recognized  principles  of  justice  cannot  be  ignored, 
and  if  they  are  grossly  violated  by  death  taxes,  we  must 
inquire  whether  that  supreme  end  of  equalizing  opportunity 
cannot  be  otherwise  attained.  The  purpose  is  not  merely 
to  take  their  wealth  from  the  rich;  it  is  to  take  such 
wealth  so  as  to  diminish  the  burdens  of  the  poor.  As  a 
matter  of  fact,  in  very  few  cases  has  the  imposition  of  pro- 
gressive death  taxes  been  followed  by  any  remission  of  the 
taxes  paid  by  the  common  people,1  the  revenue  derived  hav- 
ing been  largely  applied  to  increased  military  expenditure, 
or  to  extravagant  and  unproductive  public  works.  Yet  we 
cannot  assert  positively  that  such  results  will  always  pre- 
vail when  the  progressive  method  is  applied;  we  cannot 
carry  on  our  investigation  unless  we  assume  that  the  rev- 
enue obtained  by  the  government  is  mainly  expended  for 
the  benefit  of  the  community.  It  seems  clear  that  if  pro- 
gressive death  taxes  really  reduce  the  capital  of  a  country, 
they  tend  to  impair  the  condition  of  the  common  people 
by  decreasing  the  fund  which  supports  them.  But  this 
objection,  as  has  been  pointed  out,  applies  to  the  injudi- 
cious extension  of  the  progressive  principle,  and  not  to 
the  progressive  principle  itself;  nor  would  it  be  easy  to 
prove  that  in  practice  the  capital  of  any  country  has  in 
modern  times  been  seriously  reduced  by  such  taxation, 
whatever  may  have  been  true  in  the  past.2 

1  It  should  be  said  that  in  his  budgets  Mr.  Gladstone  consistently 
labored  to  attain  this  result. 

2  Prof.  Sidgwick,  testifying  before  the  Commission  on  Local  Taxa- 
tion in  1899,  said  that  it  could  hardly  be  doubted  that  if  the  death 
duties,  then  some  £14,000,000,  had  not  been  exacted  from  beneficiaries, 
by  far  the  larger  part  would  have  been  treated  as  capital.    His  conclu- 
sion was  "that  a  diminution  in  the  capital  annually  saved  does  tend  to 
result  from  these  duties ;  and  that  in  consequence  a  slight  tendency  to 
raise  the  rate  of  interest  and  thereby  compensate  for  a  portion  of  the 


TRANSFERS  OF  PROPERTY  AT  DEATH   225 

Some  reference  has  been  made  above  to  the  practice 
of  insuring  against  the  damage  to  estates  caused  by  the 
death  taxes,  and  it  is  plain  that  if  this  practice  became 
general,  the  real  burden  of  these  duties  might  fall  else- 
where than  as  stated.  Doubtless  it  is  impracticable  to 
obtain  the  information  necessary  to  determine  the  extent 
of  this  practice;  and  perhaps  the  cost  of  insurance  can- 
not as  yet  be  accurately  known.  It  is  evident,  however, 
that  the  effect  of  the  practice  is  to  exempt  the  shares  of 
beneficiaries  of  decedent's  estates  from  the  diminution 
presumptively  to  be  caused  by  the  taxes.  Whatever  the 
amount  of  the  tax  levied  by  the  government,  that  amount 
is  repaid  by  the  insurance  company  to  the  beneficiary. 
The  premiums  on  such  policies  of  insurance,  however, 
have  been  paid  by  the  decedent  during  his  life.  They  have 
constituted  a  diminution  of  his  income,  precisely  as  the 
income  tax  constitutes  such  a  diminution.  Apparently, 
then,  the  burden  of  the  death  taxes  may  really  be  borne, 
not  by  the  beneficiaries,  but  by  the  owners  of  the  estates 

burden  laid  by  the  duties  on  the  owners  of  capital  may  reasonably  be 
assumed."  Prof.  A.  Marshall  expressed  similar  views.  The  consider- 
able rise  of  the  rate  of  interest  since  1899  may  be  regarded  as  a  con- 
firmation of  these  propositions;  and  they  may  be  extended  so  as  to 
apply  to  laborers,  whose  compensation  may  be  lessened  by  the  greater 
cost  of  obtaining  capital.  Prof.  Sidgwick's  opinion  is  confirmed  by 
some  investigations  made  by  the  Statist,  covering  the  three  years  1890, 
1891,  and  1892.  About  140  estates  valued  at  over  £100,000  were  sub- 
jected to  death  taxes  in  each  of  those  years.  It  is  to  be  observed  in 
the  first  place  that  the  size  of  these  estates  is  largely  due  to  the  great  age 
of  those  who  acquired  them.  Thus  among  the  138  persons  dying  in  1891 
possessed  of  estates  of  this  size,  40  were  between  76  and  95  years  old ; 
their  average  age  being  83,  and  33  of  them  being  over  80.  In  the 
second  place,  the  Statist  declares,  it  is  the  judgment  of  men  conversant 
with  business  that  hardly  one  of  these  estates  was  the  result  of  finan- 
cial speculation.  Property  thus  accumulated  must  to  a  great  extent 
belong  to  the  capital  fund  of  a  country,  and  to  tax  it  heavily  must 
tend  to  diminish  that  capital. 

15 


226  THE  METHODS  OF  TAXATION 

taxed,  who  have  deprived  themselves,  perhaps  for  many 
years,  of  a  part  of  their  income.  But  even  so  much  as 
this  cannot  be  positively  asserted.  The  sum  necessary  to 
meet  these  premiums  may  have  been  taken  by  the  dece- 
dent out  of  that  part  of  his  income  that  he  had  devoted  to 
the  maintenance  of  his  family.  His  personal  expense  may 
or  may  not  have  been  altered.  He  may  deny  himself  some 
comforts  or  luxuries;  or  he  may  cease  to  provide  for  his 
wife  and  children  some  of  the  luxuries  and  comforts  to 
which  they  have  been  used.  In  the  latter  event,  as  the 
wife  and  children  are  presumptively  the  future  owners 
of  the  estate,  they  will  have  paid  the  tax  on  the  succes- 
sion in  advance,  out  of  the  results  of  their  previous 
abstinence.1 

These  considerations  tend  to  support  the  view  that  death 
taxes  may  eventually  become  elements  in  the  cost  of  pro- 
duction calculable  in  the  same  manner  as  damage  from 
fire  and  flood  and  burglary.  It  may  not  become  customary 

1  Sir  H.  Primrose,  Chairman  of  the  Board  of  Inland  Revenue,  cal- 
culates that  the  estate  duty  amounts  to  an  income  tax  of  6d.  in  the 
pound  on  estates  yielding  an  income  from  £40  to  £400  a  year,  Is.  on 
estates  from  £4,000  to  £6,000,  and  Is.  3%d.  on  £40,000  a  year  and  up- 
wards. If  the  calculation  is  based  on  what  the  beneficiary  or  successor 
receives,  the  figures  would  be  respectively  9d.,  Is.  6d.  and  2s.  in  the 
pound.  But  this  calculation  omits  the  legacy  and  succession  duties, 
which  come  to  nearly  £4,000,000.  Were  these  included  the  computed 
income  tax  would  be  greater  by  perhaps  twenty-five  or  thirty  per  cent. 

Since  this  calculation  was  made,  the  death  duties  have  been  in- 
creased on  estates  of  £150,000  and  over.  From  £150,000  to  £250,000 
the  tax  has  been  raised  from  6£  to  7  per  cent;  from  £250,000 to 
£500,000,  from  7  to  8  per  cent;  from  £500,000  to  £750,000,  from 
1\  to  9  per  cent;  and  when  the  estate  is  over  £1,000,000,  it  is  taxed  at 
10  per  cent  on  the  first  million,  and  at  advancing  rates  on  the  excess 
over  a  million,  so  that  an  estate  of  £3,000,000  and  over  would  pay  a 
tax  of  15  per  cent  on  this  excess.  A  legacy  duty  of  10  per  cent  might 
be  added  to  this;  and  as  the  estate  might  have  to  pay  taxes  in  more 
than  one  jurisdiction,  to  say  nothing  of  legal  expenses,  the  supposed 
evil  of  great  fortunes  would  seem  in  a  way  to  be  soon  eradicated. 


TRANSFERS  OF  PROPERTY  AT  DEATH   227 

in  this  country  to  insure  against  them  specifically  as  is 
done  in  England,  where  one  can  insure  against  almost 
any  conceivable  occurrence;  but  the  practice  of  life  in- 
surance accomplishes  the  same  purpose.  A  man  insures 
his  life  that  his  family  may  not  be  left  without  resources 
on  his  death,  and  it  matters  not  whether  their  resources 
shall  be  diminished  by  the  exactions  of  rulers,  or  by  some 
other  cause.  We  can  safely  infer  from  the  vast  extent 
of  life  insurance  that  the  desire  to  provide  for  the  family 
after  death  is  extremely  powerful,  and  it  is  legitimate  to 
reason  that  the  payment  of  death  taxes  will  before  long 
become  an  element  in  the  calculations  of  prudent  men. 
Some  of  them  will  arrange  to  dispense  with  the  interfer- 
ence of  the  officers  of  government  in  disposing  of  their 
estates;  some  will  make  allowance  for  the  probable  loss 
from  this  cause  in  effecting  insurance  on  their  lives,  and 
reduce  their  expenses  by  the  amount  necessary  for  the 
increased  premiums ;  some,  differently  situated,  will  spend 
while  living  that  which  they  would  have  bequeathed,  buy- 
ing life  annuities  or  consuming  their  principal  directly; 
some  will  try  to  increase  their  wealth  so  as  to  make  up  for 
the  anticipated  loss;  some  will  think  it  not  worth  while 
to  save  money  for  the  benefit  of  tax-gatherers  and  place- 
holders, and  will  prefer  easier  relations  and  fewer  respon- 
sibilities than  attend  marriage  and  the  rearing  of  children. 
The  objection  that  these  taxes  necessarily  result  in  great 
inequality  of  sacrifice  on  the  part  of  those  who  pay  them 
is  a  very  serious  one.  It  is  impossible  for  the  legislature 
to  ascertain  the  circumstances  of  the  individual  legatee; 
no  practical  scheme  of  such  a  kind  has  ever  been  brought 
forward.  There  has  been,  we  have  remarked,  some  at- 
tempt in  England  to  alleviate  the  sacrifices  that  may  be 


228  THE  METHODS  OF  TAXATION 

caused  when  several  deaths  occur  in  a  family  within  a  few 
years;  the  statute  attempts  to  avert  the  ruin  that  might 
thus  be  brought  upon  an  estate.  Possibly  this  particular 
injustice  may  admit  of  a  partial  remedy;  but  its  victims 
will  naturally  entertain  very  bitter  feelings  toward  a  com- 
munity that,  as  they  look  on  the  matter,  has  robbed  them. 
It  is  of  no  consequence  that  the  community  maintains  that 
such  feeling  is  improper  and  disloyal.  The  feeling  will 
exist  so  long  as  the  cause  for  it  exists,  and  it  is  certainly 
a  serious  evil  when  any  considerable  number  of  citizens 
feels  that  it  has  been  oppressed  and  plundered.  Yet  this 
evil  also  may  be  mitigated,  if  not  removed,  by  exempting 
legacies  even  of  considerable  size  from  taxation,  and  by 
applying  the  progressive  method  to  large  legacies  with 
moderation. 

A  very  grave  objection  to  these  taxes  appears  when  we 
consider  the  expense  of  collecting  them.  This  expense  is 
commonly  measured  by  the  amount  of  the  fees  and  salaries 
paid  to  the  tax-gatherers;  a  mode  of  computation  that  is 
grossly  inadequate.  The  government  is  put  to  additional 
expense  for  the  rent  of  offices,  etc. ;  but  the  chief  expense 
falls  on  those  entitled  to  the  estate  of  the  decedent.  When 
the  property  is  small,  and  simple  in  character,  and  when 
it  passes  directly  by  bequest  or  devise  or  inheritance  into 
absolute  ownership,  it  may  be  practicable  to  administer 
the  estate  without  legal  aid.  But  it  is  only  necessary  to 
read  the  statutes  on  this  subject  in  order  to  see  that  prob- 
lems must  arise  in  most  cases  that  are  quite  insoluble  by 
the  ordinary  layman,  and  that  frequently  demand  judicial 
settlement.1  In  fact,  it  may  be  doubted  whether  the  or- 

1  Both  in  England  and  in  this  country  the  statutes  provide  that 
where  the  difficulty  of  determining  the  amount  of  the  tax  becomes  very 


TRANSFERS  OF  PROPERTY  AT  DEATH   229 

dinary  "  business  man  "  could  comprehend  these  statutes 
at  all,  especially  since  it  often  happens  that  those  of  sev- 
eral jurisdictions  must  be  consulted.  When  the  property 
is  of  many  varieties,  and  especially  when  estates  not  in 
fee  simple  are  created,  expert  appraisers  and  counsel  must 
be  employed,  not  only  to  advise  but  also  to  carry  on  the 
proceedings;  and  in  such  cases  the  cost  to  the  estate  of 
preparing  to  pay  the  tax  may  often  equal  or  exceed  the 
amount  of  the  tax  itself,  and  is  perhaps,  as  a  rule,  more 
than  the  cost  to  the  government  of  collecting  it.  The  ex- 
pense is  sometimes  increased  by  the  practice  of  rewarding 
the  tax-gatherers  by  fees,  which  have,  in  the  case  of  some 
large  estates,  been  enormous.  When  the  collection  of  a 
tax  involves  so  much  expense  as  this,  it  can  be  defended 
as  just,  if  at  all,  only  by  clear  proof  that  by  no  other 
means  can  the  desired  equality  of  opportunity  be  attained. 
An  objection,  of  which  it  is  difficult  to  estimate  the 
force,  relates  to  the  possibility  of  avoiding  the  tax.1  It  is 

great,  the  tax  collectors  are  empowered  to  fix  it  at  such  a  figure  as  they 
think  proper.  When  governments  are  steeped  in  corruption  it  is  easy 
to  see  that  abuses  may  result  from  lodging  such  arbitrary  power  in  the 
hands  of  tax-gatherers. 

1  Prior  to  1853  the  death  duties  in  England  were  comparatively 
light,  but  were  nevertheless  to  a  great  extent  avoided.  Gladstone  re- 
marked of  this  (although  the  conveyancers  contradicted  him),  "With 
respect  to  personal  property  we  know  that  the  astuteness  of  lawyers 
and  the  vigilant  care  for  personal  interests  continually  are  at  work  to 
defeat  and  escape  the  operation  of  the  law  —  to  invent  new  modes  of 
escaping  the  legacy  duty  —  and  this  with  such  extraordinary  success 
that  although  there  has  been  an  immense  increase  in  the  personal  prop- 
erty of  the  country,  such  increase  is  scarcely  traceable  in  the  tables  of 
your  legacy  duty ;  and  we  know  this,  that  arrangements  are  made  for 
that  end  which  may  be  called  all  but  fraudulent."  He  expected  to  get 
£2,000,000  from  his  increased  taxes,  but  got  only  £800,000,  and  Sir 
W.  Harcourt  remarked  in  1894  that  even  then,  after  nearly  forty 
years,  these  taxes  produced  only  three-fourths  of  the  amount 
anticipated. 


230  THE  METHODS  OF  TAXATION 

urged  that  by  gifts  during  life,  and  by  certain  expedients 
with  which  lawyers  are  familiar,  men  may  effect  the  dis- 
tribution of  their  estates  without  subjecting  them  to  taxa- 
tion. Premature  death,  however,  may  interrupt  such  ar- 
rangements, and  in  such  event  there  will  be  discrimination 
against  the  unfortunate.  But,  on  the  theory  that  bene- 
ficiaries are  the  real  sufferers,  it  is  evident  that  unless 
they  have  been  taken  into  the  confidence  of  the  decedent, 
they  can  do  little  or  nothing  to  avoid  the  tax.  They  may 
foresee  it,  and  understand  how  it  can  be  avoided;  but 
they  are  helpless.  It  seems  altogether  impossible  at  pres- 
ent even  to  conjecture  to  what  extent  men  plan  to  avoid 
these  taxes,  which  have  been  applied  but  a  few  years,  and 
which  are  not  yet  fully  understood.  Hitherto,  it  may 
perhaps  be  thought,  the  indications  are  that  most  rich 
men  have  allowed  their  estates  to  be  taxed;  and  if  the 
burden  is  not  very  heavy,  they  may  choose  to  bear  it,  rather 
than  undergo  the  trouble  of  evading  it.  Aged  men,  espe- 
cially, who  are  often  weary  of  the  cares  of  life,  and  de- 
sirous chiefly  of  passing  the  remainder  of  their  days  in 
peace,  sometimes  appear  indifferent  to  what  happens  after 
they  are  gone.  They  have  learned  how  difficult  it  is  to 
anticipate  the  course  of  events,  and  how  often  the  arrange- 
ments that  men  make  for  the  future  prove  disappointing; 
they  have  perhaps  seen  that  great  legacies  prove  occasion- 
ally a  curse  rather  than  a  blessing  to  those  that  receive 
them.  Hence  the  prospect  that  the  government  will  seize 
a  large  part  of  their  property,  after  they  have  ceased  to 
enjoy  it,  may  not  appal  them;  they  may  even  regard  it 
with  indifference,  or  be  willing  to  relieve  themselves  of 
the  care  of  selecting  desirable  objects  of  beneficence  by 
leaving  the  task  to  the  legislature.  Nor  may  we  ignore 


TRANSFERS  OF  PROPERTY  AT  DEATH   231 

the  desperate  tenacity  with  which  the  aged  often  cling 
to  that  dominion  of  which  they  know  that  death  alone 
can  deprive  them.  But  of  these  matters  experience  as  yet 
tells  us  little;  we  have  never  before  in  this  country  had 
legislation  directed  against  the  wealthy  as  a  class,  and 
no  one  can  tell  what  its  ultimate  results  may  be.  But  at 
least  it  may  be  said  that  the  death  tax  does  not  occasion 
the  outrageous  injustice  of  the  general  property  tax,  and 
that  if  it  could  be  substituted  for  the  latter,  and  graduated 
as  the  theory  on  which  it  rests  requires,  justice  would 
be  much  more  nearly  attained  than  at  present. 

It  is  to  be  remarked,  however,  that  the  death  taxes 
imposed  by  our  legislatures  make  no  pretence,  as  a  rule, 
of  complying  with  any  principle  of  justice  whatever.  They 
are  usually  cruel,  because  levied  on  small  estates,  and 
because  they  reduce  the  shares  not  only  of  strangers  and 
collateral  relatives,  but  also  those  of  widows  and  orphans. 
They  seem  to  be,  with  few  exceptions,  imposed  on  the 
estate  of  the  decedent  and  graduated  accordingly,  rather 
than  regulated  by  the  size  of  legacies ;  although  the  latter 
principle  was  adopted  in  the  United  States  statute  of 
1898,  and  is  partially  recognized  in  the  laws  of  some 
states,  as  of  Massachusetts.  What  is  peculiarly  inde- 
fensible, and  calculated  to  arouse  the  most  bitter  animos- 
ity toward  the  government  on  the  part  of  the  sufferers, 
is  the  fact  that  the  laws  of  the  different  states  often  cause 
the  tax  to  be  levied  several  times  on  the  same  estate.  A 
resident  of  Connecticut,  for  instance,  may  own  stock  in 
a  foreign  corporation,  and  keep  the  certificates  that  de- 
clare his  interest  in  a  vault  in  the  city  of  New  York. 
His  legatees  may  find  themselves  mulcted  not  in  one  state 
but  in  three.  For  this  injustice  the  legislature  of  New 


232  THE  METHODS  OF  TAXATION 

York  is  primarily  responsible;  and  in  order  to  exact 
an  impost  for  which  no  justification  exists,  it  has  resorted 
to  the  infamous  practice  —  in  which  it  has  been  imitated 
by  some  other  states  —  of  offering  rewards  to  informers 
who  succeed  in  discovering  within  its  jurisdiction  prop- 
erty, or  the  evidences  of  or  claims  to  property,  belonging 
to  the  estates  of  non-resident  decedents.  It  seems  clear 
that  a  certificate  of  stock,  or  a  parchment  declaring  an 
indebtedness,  has  no  value  except  for  evidential  purposes; 
the  stock  may  be  without  the  jurisdiction,  and  so  may 
be  both  the  debtor  and  creditor,  and  it  is  where  the  value 
exists  that  the  tax  for  protecting  it  should  be  imposed.1 
There  is  possibly  some  hope  that  interstate  comity  may 
in  time  correct  these  scandalous  abuses. 

No  doubt  the  death  taxes  now  generally  adopted  in  this 
country  constitute  a  serious  innovation.  With  very  few 
exceptions,  our  governments  until  recently  exacted  no  fine 
from  those  who  succeeded  to  property,  and  recognized  no 
such  principle  of  taxation  as  that  of  the  progressive  method. 
That  principle,  however,  has  now  been  accepted  by  the 
legislatures,  and  probably  by  the  mass  of  the  people.  If 
it  has  been  permanently  established,  there  must  be  some 
modification  of  the  rights  of  property,  and  of  the  princi- 
ples of  justice  affecting  those  rights.  The  process  of  re- 
adjustment cannot  be  watched  without  anxiety;  but  we 
do  not  here  examine  its  political  and  social  consequences.2 

1  It  is  difficult  to  take  seriously  the  claim  of  one  of  the  judges  of  the 
New  York  Court  of  Appeals,  that  as  some  decedents  might  very  likely 
have  evaded  personal  property  taxes  when  living,  all  personal  property 
should  be  made  to  pay  death  taxes.    This  theory  of  justice  seems  to  be 
that  adopted  by  Herod  in  ordering  the  slaughter  of  the  innocents ;  but 
it  is  perhaps  to  be  explained  by  the  confusion  of  thought  due  to  attrib- 
uting moral  delinquency  to  such  an  entity  as  personal  property. 

2  It  is  somewhat  remarkable  that  Mr.  Gladstone  stood  in  fear  of  the 


TRANSFERS  OF  PROPERTY  AT  DEATH  233 

"No  amount  of  discouragement,  or  even  persecution,  to 
judge  from  experience,  has  availed  to  extinguish  the  be- 
nevolence of  mankind.  Yet  it  is  conceivable  that  very 
drastic  measures  of  taxation  may  go  far  to  accomplish  this 
result,  and  that  if  rich  men  feel  that  they  are  singled 
out  for  plunder,  they  may  relieve  themselves  of  responsi- 
bilities hitherto  voluntarily  assumed.  In  fact  it  is  con- 
tended by  some  persons  that  what  is  now  done  by 
charitable  men  should  be  done  by  the  officers  of  gov- 
ernment; that  what  the  poor  have  received  as  alms 
shall  now  be  turned  over  to  them  as  a  debt  owed  by  the 
society  whose  institutions,  it  is  said,  have  caused  their 
poverty. 

The  social  consequences,  however,  of  excluding  the  be- 
nevolent emotions  from  their  usual  field  may  be  very 
disastrous ;  the  result  in  France,  it  might  almost  be  said, 
has  been  to  replace  charity  with  hatred.  ~No  society  is 
sound  when  its  government  is  hated  by  a  considerable 
portion  of  its  better  educated  citizens ;  nor,  perhaps,  will 
it  prove  to  be  sounder  when  the  mass  of  its  poorer  citizens 
have  been  taught  that  the  easiest  way  to  obtain  wealth 
is  to  take  it  from  the  rich  by  means  of  taxation.  The 
benevolent  emotions  must  still  have  some  play;  when  we 

spirit  that  he  had  done  so  much  to  evoke.  He  dreaded  the  results  of 
suggesting  to  the  common  people  the  idea  that  they  might  throw  the 
whole  burden  of  taxation  upon  the  rich.  When  in  opposition,  in  1876, 
he  declared  that  those  with  whom  he  acted  should  oppose,  not  as  Lib- 
erals, but  "as  men  of  honor  and  prudent  men,"  the  policy  of  abating 
the  tax  on  small  incomes;  "a  measure  the  obvious  purpose  of  which 
is  to  relieve  the  larger  and  more  numerous  classes  of  society  at  the 
expense  of  the  more  limited  and  wealthier."  This  is  a  proposal,  he 
added,  "by  which  I  will  not  say  you  bribe  the  majority,  but  by  which 
you  induce  the  majority  of  the  actual  taxpayers  to  acquiesce  in  the 
increase  of  a  tax  by  making  that  increase  positively  and  absolutely 
beneficial  to  them.  You  encourage  them  to  run  in  upon  the  minority." 


234  THE  METHODS  OF  TAXATION 

consider  the  thousand  ways,  public  and  private,  in  which 
the  well-to-do  people  of  this  country,  as  a  class,  are,  in 
season  and  —  sometimes  —  out  of  season,  endeavoring  to 
make  the  lives  of  their  less  fortunate  neighbors  happier  and 
better,  we  cannot  imagine  that  these  emotions  will  cease 
to  exist  But  we  can  imagine  that  they  will  be  restricted, 
and  that  with  the  diminution  of  the  means  for  exercising 
them,  the  importance  of  the  self -regarding  emotions  will 
be  increased.  On  the  other  hand,  gratitude  for  benefac- 
tions will  cease  when  they  are  taken  as  rights ;  but  it  may 
be  found  that  it  was  gratitude  by  which  envy  was  held 
in  leash.  The  meanest  of  passions  may  be  treated  with 
contempt  when  exhibited  by  an  individual.  When  it 
animates  a  democracy  its  power  becomes  too  formidable 
to  be  despised.1 

1  In  1907  an  "arrangement"  was  entered  into  by  the  governments  of 
France  and  England  (without  the  authority  of  either  parliament), 
which  may  justly  be  characterized  as  disgraceful  to  the  English  people. 
The  Inland  Revenue  Board  is  to  furnish  to  the  direction  generate  de 
I'enregistrement  such  information  as  it  acquires  concerning  the  estates 
of  deceased  persons  whose  domicile  was  in  France,  and  reciprocally. 
Of  this  arrangement  M.  Paul  Leroy  Beaulieu  observes  that  neither 
government  relinquishes  its  claims  to  tax  the  estate  of  a  foreigner; 
hence  the  only  purpose  of  the  arrangement  is  to  impose  double  taxa- 
tion. "Cela  6tant,  on  a  le  droit  de  dire  que  c'est  la  '  un  arrangement ' 
tout  £  fait  ille*gitime  et  manifestement  immoral;  car,  en  e"quite",  cette 
succession  ne  doit  pas  deux  droits;  elle  n'en  doit  qu'un."  He  calculates 
that  only  in  rare  cases  would  the  cumulated  tax  on  direct  successions 
be  less  than  6  or  7  per  cent,  and  on  others  less  than  15  to  18  per  cent; 
to  which  must  be  added  several  per  cent  for  legal  expenses.  The 
French  government  further  proposes  to  penalize  those  who*  succeed  to 
estates  which  Frenchmen  have  invested  abroad,  when  they  have  not 
been  subjected  to  taxation  in  France  during  the  life  of  the  owner,  to  the 
extent  of  one-quarter  of  such  investments.  We  are  not  here  considering 
the  policy  or  the  practice  of  the  French  government  in  taxation; 
but  the  comments  of  this  distinguished  economist  on  the  character  of 
this  agreement  deserve  the  attention  of  the  English-speaking  peoples. 
"Comment  les  moralistes  peuvent-ils  juger  cet  'arrangement'  entre 
le  Gouvernement  anglais  et  le  Gouvernement  francais,  qui  a  pour 


TRANSFERS  OF  PROPERTY  AT  DEATH   235 

objet  de  faire  payer  deux  droits,  le  droit  anglais  et  le  droit  franc.ais,  a 
la  me'me  succession?  N'y  a-t-il  pas  la  un  exemple  des  plus  fdcheux,  et 
quand  les  Gouvernements  violent  aussi  manifestement  les  principes 
de  1'e"  quite",  sont-ils  bien  venus  a  se  plaindre  que  les  contribuables 
cherchent  a  6chapper  a  leur  excessive  et  inique  fiscalite' ?" 


CHAPTER   VIII 

THE  DIFFUSION  OF  TAXES 

THE  method  adopted  in  prosecuting  this  inquiry  has 
been  rather  historical  than  logical.  This  course  has  been 
followed  because  the  result  of  an  examination  of  the  diffu- 
sion of  taxes,  which  should  logically  precede  historical 
investigations,  might  have  been  to  make  such  investigations 
seem  unnecessary.  If  taxes  are  not  in  fact  a  burden  on 
those  on  whom  the  legislature  intends  them  to  fall,  it  might 
be  thought  a  waste  of  time  to  consider  methods  and  meas- 
ures of  taxation  which,  so  far  as  relates  to  equalizing  sacri- 
fice, must  fail  of  their  purpose.  But  it  is  not  probable  that 
this  cutting  the  ground  from  under  all  existing  systems  of 
taxation  would  have  been  found  satisfactory.  The  pre- 
sumption in  favor  of  what  is  established,  simply  because 
it  exists,  is  with  most  people  sufficient  to  overcome  the 
weight  of  the  most  perfect  logical  demonstration.  Hence 
it  has  seemed  best  to  examine  the  practical  operation  of 
established  methods,  on  the  assumption  that,  if  they  were 
consistently  applied,  the  burdens  of  taxation  would  rest 
where  the  legislature  intended.  It  has  from  time  to  time 
appeared  that  this  assumption  is  not  altogether  tenable ;  but 
the  inquiry  would  have  been  gravely  complicated  by  paus- 
ing to  examine  its  validity.  We  have  now,  however,  reached 
a  stage  where  this  examination  can  no  longer  be  postponed. 

The  collection  of  taxes  by  government  is  by  definition 
the  same  thing  as  the  subtraction  of  a  part  of  the  wealth 
of  its  subjects.  Some  of  these  subjects,  or  all  of  them, 


THE  DIFFUSION  OF  TAXES  237 

take  money  from  their  pockets  and  pay  it  to  the  tax- 
gatherer.  But  it  is  notorious  that  in  all  countries  many  of 
the  subjects  never  pay  any  money  to  their  governments; 
they  may  never  even  see  a  tax-gatherer.  The  government 
of  the  United  States  takes  enormous  sums  of  money  from 
its  subjects,  but  the  persons  who  pay  this  money  probably 
do  not  number  two  per  cent  of  the  population,  if  we  leave 
out  of  view  the  money  paid  for  postage,  which  is  not  usu- 
ally reckoned  as  a  tax.  The  City  of  New  York,  or  more 
precisely  the  Borough  of  Manhattan,  collects  a  vast  reve- 
nue, but  not  one  in  twenty-five  of  its  inhabitants  pays  any 
part  of  it.  The  inhabitants  number  2,200,000,  but  the 
number  of  parcels  of  real  estate  assessed  is  but  100,000, 
and  the  number  of  individual  residents  paying  taxes  on 
their  own  personal  property  is  only  13,000.  Common 
sense,  however,  revolts  at 'the  proposition  that  the  wealth 
of  the  comparatively  few  persons  who  pay  these  prodigious 
sums  is  depleted  to  a  corresponding  extent ;  that  the  duties 
paid  by  an  importer  in  New  York,  or  the  taxes  paid  by  a 
distiller  in  Illinois,  diminish  his  property  and  that  of  no- 
body else.1  It  seems,  therefore,  that  the  sacrifice  involved 
in  taxation  may  not  be  made  by  the  individual  who  pays 
the  money  to  the  government,  but  by  other  persons,  and 
this  transference  of  sacrifice  is  usually  denominated  the 
shifting  or  diffusion  of  taxation.  It  follows  also  that  the 
intent  of  the  legislature  that  particular  persons  shall  pay 
the  tax  imposed  by  a  general  law  constitutes  no  presump- 
tion that  such  persons  will  really  carry  the  burden  of  the 

1  This  is  not  clear  to  the  minds  of  all  our  statesmen.  A  representa- 
tive of  Illinois  once  maintained  in  Congress  that  the  people  of  that  state 
paid  the  taxes  on  the  spirits  distilled  there,  and  a  representative  of  New 
York  made  a  like  assertion  concerning  the  duties  on  imports  collected  at 
the  port  of  New  York. 


238  THE  METHODS  OF  TAXATION 

tax.  That  this  is  true  in  many  cases,  and  to  a  great  extent, 
is  disputed  by  nobody;  but  in  what  cases,  and  to  what 
extent,  even  if  discoverable  by  experts,  is  not  generally 
understood. 

As  was  explained  at  the  outset,  the  scope  of  this  inquiry 
cannot  extend  to  the  complete  analysis  of  the  effects  imme- 
diately produced  when  a  particular  tax  is  first  imposed. 
It  is  evident  that  a  sudden  and  unforeseen  demand  for 
money  made  on  an  individual  must  be  wholly  different  in 
its  effects  on  his  circumstances  from  a  continuous  and 
anticipated  demand.  The  latter  is  taken  into  account  in 
all  those  calculations  concerning  the  expenses  and  profits  of 
his  occupation  which  every  man  must  make;  the  former 
cannot  be.  While  economists  have  carefully  investigated 
the  results  of  these  unforeseen  variations  in  the  conditions 
of  industry,  and  while  their  conclusions  are  of  practical 
value  when  it  is  proposed  to  introduce  changes  in  the  sys- 
tem of  taxation,  the  nature  of  our  subject  compels  us  to 
take  but  incidental  notice  of  these  investigations  and  con- 
clusions. All  that  we  can  here  attempt  is  to  ascertain  the 
distribution  of  burdens  under  an  established  system  of 
taxation ;  a  system,  that  is,  where  the  laws  imposing  taxes 
a.re  duly  enacted  by  the  legislature,  and  are  changed  only 
gradually,  and  with  such  warning  as  is  implied  in  the 
obvious  tendency  of  public  opinion.  The  imposition  of  a 
new  tax  usually  has  many  unexpected  results,  and  it  is 
idle  to  attempt  the  precise  solution  of  a  problem  the  ele- 
ments of  which  are  altered  while  the  investigation  is  taking 
place.  In  other  words,  taxes  are  to  be  regarded  as  known 
and  calculable  elements  in  the  cost  of  the  production  and 
exchange  of  goods,  in  the  sale  of  services,  and  in  the  dis- 
tribution of  expenditure. 


THE  DIFFUSION  OF  TAXES  239 

Some  confusion  of  thought  may  perhaps  be  avoided  if 
we  distinguish,  once  for  all,  the  unproductive  expenditure 
of  government  from  what  has  been  called  its  remunera- 
tive expenditure.  If  a  citizen  pay  to  a  private  contractor 
the  same  sum  for  removing  ashes  from  his  house  that  he 
pays  as  a  tax  for  the  same  service  to  the  city  government, 
the  expenditure  may  be  called  remunerative.  Similar  rea- 
soning applies  in  the  case  of  water  rates.  Charges  of  this 
description  are  not  usually  classified  as  taxes;  and  the 
charges  for  the  post  are  by  many  writers  also  excluded. 
But  much  the  greater  part  of  the  expenditure  of  govern- 
ment, however  necessary  it  may  be,  is  not  remunerative.  It 
would  be  absolutely  impossible  to  apportion  the  benefits  re- 
sulting from  this  expenditure  amongst  individual  subjects, 
and  the  expenditure  is  unproductive  in  the  sense  of  not  re- 
placing the  capital  expended.  It  may  be  worth  while  for 
a  nation  at  peace  to  spend  $200,000,000  a  year  in  prepara- 
tion for  war,  but  if  200,000  farmers  were  to  spend  that 
amount  in  increasing  the  products  of  their  land,  the  results 
to  the  wealth  of  the  society  would  be  very  different.  Every 
prudent  man  distinguishes  his  income  from  his  outgo,  and 
his  productive  from  his  unproductive  expenditure.  He 
regards  his  taxes  as  an  element  of  cost;  he  deducts  them 
from  what  he  calls  his  profits,  and  never  thinks  of  adding 
them  to  his  revenue.  Whatever  criticism  may  be  made 
of  this  system  of  classification,  we  are  obliged  to  employ 
it  because  it  is  established  and  understood.  To  substitute 
another,  even  if  it  be  theoretically  more  scientific,  would 
be  for  most  persons  to  render  the  whole  subject  of  eco- 
nomics, as  well  as  taxation,  unintelligible.  The  only  taxes 
here  treated,  therefore,  are  taxes  that  are,  in  the  sense 
above  explained,  unremunerative. 


240  THE  METHODS  OF  TAXATION 

The  system  of  taxation,  it  should  be  observed,  is  a  con- 
stant factor  only  in  the  sense  that  other  economic  factors 
are  constant,  i.  e.  to  the  extent  that  inferences  may  be 
drawn  from  them  with  reasonable  certainty.  The  return 
of  the  seasons  is  a  factor  of  this  kind ;  but  no  two  summers 
are  precisely  similar.  They  are,  however,  so  nearly  similar 
that  the  farmer  makes  his  plans  on  the  assumption  of  their 
constancy.  There  may  be  more  rain  or  less  rain  than  he 
expected,  but  on  the  whole  the  quantity  is  sufficiently  con- 
stant to  form  a  basis  for  calculation;  and  so  much  con- 
stancy as  this  is  to  be  assumed  in  the  case  of  taxation.  The 
rate  is  perhaps  never  quite  the  same  in  any  two  years,  but 
the  changes  are  not  very  great ;  and,  taking  one  year  with 
another,  they  may  be  disregarded.  It  is  to  be  added,  how- 
ever, that  in  reasoning  on  this  subject  we  are  obliged  to  as- 
certain the  effect  of  any  tax  by  supposing  it  to  be,  on  the 
one  hand,  newly  imposed  or  increased;  or,  on  the  other 
hand,  to  be  reduced  or  abolished.  But  this,  it  is  appar- 
ent, is  really  an  inquiry  into  the  effect  on  men's  calcula- 
tions of  changes  in  the  conditions  of  the  industrial  prob- 
lems which  they  are  continually  engaged  in  solving.  It  is 
the  fact  that  men  calculate,  that  they  are  beings  looking 
before  and  after,  that  causes  the  diffusion  of  taxes. 

For  in  a  modern  industrial  society  most  men  are  ani- 
mated with  the  desire  to  improve  their  condition  and  that 
of  their  families ;  even,  it  may  be  paradoxically  said,  be- 
fore their  families  exist.  This  means  that  if  men  have 
services  to  sell,  they  will  try  to  sell  them  for  as  high  a  price 
as  possible;  that  if  they  have  goods  to  sell,  they  will  get 
as  much  for  them  as  they  can ;  that  if  they  have  money  to 
lend,  they  will  obtain  the  highest  interest  available.  On 
the  other  hand  those  who  buy  services  will  try  to  get  them 


THE  DIFFUSION  OF  TAXES  241 

cheap ;  and  so  with  goods,  and  so  with  money.  It  is  hardly 
necessary  to  say  that  these  propositions  have  no  reference 
to  prices  actually  received  or  paid.  They  do  not  mean 
that  a  laborer  will  prefer  to  get  larger  wages  in  a  dangerous 
employment  under  a  brutal  master  than  in  wholesome  work 
under  pleasant  conditions;  or  that  an  employer  will  not 
pay  higher  wages  to  a  competent  and  faithful  laborer  than 
to  one  who  is  drunken  and  dishonest.  They  do  not  mean 
that  a  merchant  will  try  to  sell  bad  things  for  as  much  as 
good  ones,  or  will  pay  the  same  price  for  materials  without 
regard  to  their  quality.  NOT  do  they  mean  that  men  entrust 
their  money  to  the  highest  bidder,  no  matter  who  he  may 
be.  They  mean  simply  that  men  exist  in  a  competitive 
society,  based  on  barter,  and  making  use  of  borrowed  cap- 
ital. If  then  a  man  pays  high  interest  for  his  capital  and 
high  wages  to  his  laborers,  he  cannot  offer  his  products 
for  sale  at  so  low  a  price  as  his  competitor,  whose  expenses 
of  production  are  less;  if  he  demands  a  higher  price  no- 
body will  pay  it,  and  if  he  takes  a  lower  price  he  cannot 
pay  his  debts  and  must  go  into  bankruptcy,  a  result  that 
takes  place  in  hundreds  of  thousands  of  cases  every  year. 
Whoever  underestimates  the  amount  that  he  will  pay  in 
taxes  suffers  in  the  same  way  that  he  suffers  from  under- 
estimating any  other  of  the  expenses  of  production.  Before 
he  engages  in  business  he  must  calculate  this  amount,  just 
as  he  calculates  his  disbursements  for  materials  or  ma- 
chinery. And  in  modern  times  he  does  not  make  his  calcu- 
lations without  assistance.  As  Bagehot  so  lucidly  ex- 
plained, business  has  to  be  done  now  with  borrowed  money ; 
the  men  that  borrow  money  can  undersell  those  who  have 
only  their  own  capital.  The  lenders  of  money,  however, 
constitute  the  most  alert  and  astute  body  of  men  in  exist- 

16 


242  THE  METHODS  OF  TAXATION 

ence.  Their  business  consists  in  letting  other  people  have 
possession  of  their  money,  or,  what  is  even  more  critical, 
of  money  which  they  themselves  have  borrowed.  If  they 
cannot  get  their  money  back  they  will  be  ruined,  and  their 
creditors  with  them.  Hence  they  must  exercise  the  great- 
est watchfulness  over  their  debtors ;  they  will  not  lend  in 
the  first  place  until  they  are  satisfied  that  the  loan  is  safe, 
that  the  debtor  can  and  will  repay  it,  and  they  will  not 
continue  or  increase  the  loan  without  evidence  that  the 
business  of  the  debtor  is  prospering.  They  listen  to  his 
representations  and  to  his  calculations;  and  if  they  find 
them  unsatisfactory  they  cease  to  give  him  credit.  They 
are  partners  in  all  the  business  of  the  country,  and  they 
display  in  estimating  the  prospects  of  its  several  depart- 
ments an  industry  and  an  ability  that  are  truly  stupendous. 
The  celerity  with  which  men  act  on  these  calculations  is, 
however,  no  modern  phenomenon.  It  excited  the  admira- 
tion of  Ricardo  nearly  a  century  ago,  and  his  comments 
on  it  are  so  judicious  as  to  deserve  to  be  recalled.  Speak- 
ing of  temporary  variations  of  price  he  remarks : 

"  It  is  only  in  consequence  of  such  variations  that  capital  is 
apportioned  precisely,  in  the  requisite  abundance  and  no  more, 
to  the  production  of  the  different  commodities  which  happen 
to  be  in  demand.  With  the  rise  or  fall  of  price,  profits  are 
elevated  above,  or  depressed  below,  their  general  level,  and 
capital  is  either  encouraged  to  enter  into,  or  is  warned  to 
depart  from,  the  particular  employment  in  which  the  variation 
has  taken  place. 

"Whilst  every  man  is  free  to  employ  his  capital  where  he 
pleases,  he  will  naturally  seek  for  it  that  employment  which 
is  most  advantageous.  .  .  .  This  restless  desire  on  the  part  of 
all  the  employers  of  stock,  to  quit  a  less  profitable  for  a  more 
advantageous  business,  has  a  strong  tendency  to  equalize  the 
rate  of  profits  of  all,  or  to  fix  them  in  such  proportions  as 


THE  DIFFUSION  OF  TAXES  243 

may  in  the  estimation  of  the  parties  compensate  for  any  ad- 
vantage which  one  may  have,  or  appear  to  have,  over  the  other. 
It  is  perhaps  very  difficult  to  trace  the  steps  by  which  this 
change  is  effected:  it  is  probably  effected  by  a  manufacturer 
not  absolutely  changing  his  employment,  but  only  lessening 
the  quantity  of  capital  he  has  in  that  employment.  In  all 
rich  countries  there  is  a  number  of  men  forming  what  is 
called  the  monied  class;  these  men  are  engaged  in  no  trade, 
but  live  on  the  interest  of  their  money,  which  is  employed  in 
discounting  bills,  or  in  loans  to  the  more  industrious  part  of 
the  community.  The  bankers  too  employ  a  large  capital  on 
the  same  objects.  The  capital  so  employed  forms  a  circulat- 
ing capital  of  a  large  amount,  and  is  employed,  in  larger  or 
smaller  proportions,  by  all  the  different  trades  of  a  country. 
There  is  perhaps  no  manufacturer,  however  rich,  who  limits 
his  business  to  the  extent  that  his  own  funds  alone  will  allow ; 
he  has  always  some  portion  of  this  floating  capital,  increasing 
or  diminishing  according  to  the  demand  for  his  commodities. 
When  the  demand  for  silks  increases,  and  that  for  cloth 
diminishes,  the  clothier  does  not  remove  with  his  capital  to  the 
silk  trade,  but  he  dismisses  some  of  his  workmen,  he  discon- 
tinues his  demand  for  the  loan  from  bankers  and  monied  men ; 
while  the  case  of  the  silk  manufacturer  is  the  reverse:  he 
wishes  to  employ  more  workmen,  and  thus  his  motive  for 
borrowing  is  increased :  he  borrows  more,  and  thus  capital  is 
transferred  from  one  employment  to  another,  without  the 
necessity  of  a  manufacturer  discontinuing  his  usual  occupa- 
tion. When  we  look  at  the  markets  of  a  large  town,  and 
observe  how  regularly  they  are  supplied  both  with  home  and 
foreign  commodities,  in  the  quantity  in  which  they  are  re- 
quired, under  all  the  circumstances  of  varying  demand,  arising 
from  the  caprice  of  taste,  or  a  change  in  the  amount  of  popula- 
tion, without  often  producing  the  effects  of  a  glut  from  a  too 
abundant  supply,  or  an  enormously  high  price  from  the  supply 
being  unequal  to  the  demand,  we  must  confess  that  the  prin- 
ciple which  apportions  capital  to  each  trade  in  the  precise 
amount  that  it  is  required,  is  more  active  than  is  generally 
supposed."  Pol  EC.,  Chap.  IV. 


244  THE  METHODS  OF  TAXATION 

Other  conditions  beside  those  suggested  by  Ricardo  may 
operate  with  similar  results.  Every  year  a  certain  number 
of  those  engaged  in  any  trade  retire  or  die ;  and  every  year 
a  certain  number  of  young  men  attain  a  position  which 
enables  them  to  select  the  trade  in  which  they  will  engage. 
Every  year  a  certain  number  of  factories  are  burned,  and 
the  money  received  from  insurance  may  be  employed  in 
constructing  factories  for  that  trade  or  for  any  other  that 
is  preferred.  Every  year  a  certain  quantity  of  machinery 
is  worn  out  or  becomes  obsolete;  it  may  or  may  not  be 
replaced,  as  the  owner  chooses.  Every  year,  in  our  coun- 
try, population  increases  and  therewith  the  demand  for 
goods;  this  increased  demand  may  be  more  for  one  kind 
of  goods  than  another,  and  capital  will  be  employed  ac- 
cordingly. Every  year  many  manufacturers  fail;  their 
factories  may  thereafter  be  used  to  produce  the  same  kind 
of  goods  as  before,  or  a  different  kind.  This  wonderful 
elasticity  in  capital  makes  the  withdrawal  from  an  in- 
dustry in  which  the  cost  of  production  has  increased  a  com- 
paratively simple  and  expeditious  matter.  And  the  fact 
that  the  increase  in  the  cost  of  production  is  due  to  the 
imposition  of  a  tax  rather  than  to  any  other  expense  is 
immaterial. 

It  seems,  therefore,  that  a  tax  on  a  particular  employ- 
ment will  not  entail  a  peculiar  sacrifice  on  the  persons  fol- 
lowing that  employment.  If  it  were  unexpectedly  imposed 
it  would  indeed  at  first  do  so;  but  we  are  assuming  it  to 
be  an  established  impost.  Hence  the  saying  "  An  old  tax 
is  no  tax  " ;  an  old  tax,  as  defined  by  Professor  Sidgwick, 
being  a  tax  "  that  has  lasted  long  enough  for  the  cessation 
of  the  effects  of  its  first  imposition,  so  far  as  industrial 
competition  tends  to  do  away  with  those  effects."  It  fol- 


THE  DIFFUSION  OF  TAXES  245 

lows  then  that  licenses  to  pursue  particular  employments 
do  not  constitute  a  peculiar  burden  on  the  persons  engaging 
in  those  employments.  They  are  indeed  an  item  of  .ex- 
pense; but  this  item,  like  the  other  expenses  of  the  em- 
ployments, is  taken  into  consideration  by  those  who  con- 
template engaging  in  them.  Nor  is  it  material,  so  far 
as  sacrifice  is  concerned,  whether  the  license  fee  is  gradu- 
ated or  not.  If  it  is  not  graduated,  but  is  the  same  in 
amount  no  matter  how  large  the  capital  employed  may  be, 
it  is  of  course  a  relatively  heavier  burden  for  the  man  with 
a  small  capital  than  for  him  that  has  a  large  one,  and  small 
capitals  may  seek  other  employment,  thereby  freeing  the 
large  capitals  from  their  competition.  If  it  is  graduated, 
-although  no  system  of  licenses  perhaps  has  ever  been 
graduated  with  any  near  approach  to  proportionality,  — 
both  large  and  small  capitals  may  be  discouraged  from  en- 
gaging in  the  employment,  thus  freeing  capitals  already 
employed  from  the  competition  that  they  would  suffer 
were  no  license  fee  exacted. 

In  their  reasoning  on  this  subject  some  writers  have 
fallen  into  a  certain  inaccuracy ;  an  inaccuracy  from  which 
Adam  Smith  was  not  altogether  free.  He  observes: 
"  Taxes  upon  the  profits  of  stock  in  particular  employ- 
ments can  never  affect  the  interest  of  money.  Nobody  will 
lend  his  money  for  less  interest  to  those  who  exercise  the 
taxed,  than  to  those  who  exercise  the  untaxed  employ- 
ments." On  their  face  these  propositions  may  appear  self- 
evident,  and  the  second  of  them  is  indisputable ;  but  it  is 
not  true  that  the  interest  of  money  can  never  be  affected 
by  a  tax  on  a  particular  employment.  Nobody,  it  may  be 
presumed,  will  engage  in  a  taxed  employment  unless  he 
can  make  as  much  profit  therein  as  in  an  untaxed  employ- 


246  THE  METHODS  OF  TAXATION 

ment,  and  if  that  cannot  be  done,  the  amount  of  capital 
used  in  the  taxed  employment  will  diminish.  In  order  to 
equalize  profits  after  a  tax  has  been  imposed,  the  product 
of  the  taxed  employment  must  be  sold  at  a  price  sufficient 
to  compensate  the  producer  for  the  tax.  If  the  quantity 
sold  at  a  higher  price  is  the  same  as  at  the  lower  price,  the 
buyers  of  the  taxed  product  cannot  buy  so  much  as  they  did 
of  untaxed  products;  they  have  spent  more  in  one  way 
and  must  spend  less  in  others.  In  that  event  those  engaged 
in  the  untaxed  employments  must  produce  a  less  quantity, 
if  they  are  to  sell  it  at  the  same  price ;  or,  if  they  produce 
the  same  quantity,  they  must  sell  it  at  a  lower  price.  In 
either  case,  if  they  are  to  make  the  same  profit,  they  must 
reduce  their  expenses ;  which  means  that  they  must  borrow 
money  at  a  lower  rate  of  interest.  If  the  rates  of  interest 
were  not  lowered,  some  of  them  would  engage  in  the  taxed 
employment,  but  some  would  go  out  of  business  altogether. 
Therefore,  as  the  demand  for  money  would  fall,  the  rate 
of  interest  would  also  fall. 

If,  however,  the  quantity  of  the  product  of  the  employ- 
ment is  reduced,  and  it  is  sold  at  a  higher  price  after  the 
tax  is  imposed,  the  quantity  of  money  needed  in  that  em- 
ployment will  be  less,  and  the  money  no  longer  lent  to  those 
engaged  therein  must  be  lent  to  those  exercising  the  untaxed 
employments.  But  it  is  not  needed  in  those  employments, 
for  the  buyers  of  such  products  have  no  more  money  to 
spend  for  them  than  they  had  before.  The  competition  of 
lenders  will  therefore  reduce  the  rate  of  interest,  and  those 
engaged  in  the  untaxed  employments  will  for  a  time  make 
higher  profits;  but  some  of  those  engaged  in  the  taxed 
employment  will  be  attracted  by  these  profits  and  endeavor 
to  participate  in  them,  while  some  will  go  out  of  business 


THE  DIFFUSION  OF  TAXES  247 

altogether.  Thus,  it  seems,  a  tax  on  a  particular  employ- 
ment, like  any  other  event  that  increases  the  expense  of 
production,  may  be  felt  throughout  the  whole  industrial 
world;  it  may  decrease  the  profits  of  employers,  the  in- 
terest of  money  lenders,  the  wages  of  laborers,  and  these 
effects  may  reappear  in  a  loss  to  all  these  persons  as  mem- 
bers of  the  general  body  of  consumers,  who  suffer  because 
the  total  product  of  industry  is  less  than  it  was  before.  The 
whole  community  is  poorer;  but  to  ascertain  the  relative 
losses  of  these  different  individuals  in  any  concrete  in- 
stance, or  in  any  imaginable  case,  is  a  problem  the  solution 
of  which  is  entirely  beyond  human  powers. 

It  is  true  that  Adam  Smith  speaks  of  "  taxes  on  the 
profits  of  stock  in  particular  employments,"  but,  as  his 
second  proposition  shows,  he  means  taxes  on  the  employ- 
ments. In  fact,  there  is  no  such  thing  as  a  tax  on  the 
profits  of  a  particular  employment,  if  by  that  is  meant 
the  respective  profits  of  the  individuals  engaged  therein. 
There  are  taxes  on  employments,  and  taxes  on  stock;  but 
neither  of  them  have  any  determinate  relation  to  the  actual 
profit  of  the  individual  trader,  although  they  may  affect 
it  The  only  specific  tax  on  profits  is  the  income  tax ;  but 
that  is  meant  to  be  a  tax  on  the  net  profits  from  all  the 
employments  and  investments  in  which  the  individual  is 
interested,  some  of  which  may  be  prosperous,  and  others 
not.  He  may,  it  is  true,  pay  the  whole  tax  out  of  the 
gains  made  in  a  particular  employment ;  but  his  neighbor 
who  is  also  engaged  in  it  may  be  losing  money,  and  pay- 
ing his  tax  from  some  other  source  of  revenue.  In  every 
concrete  instance  of  an  income  tax,  it  must  be  observed, 
salaries,  dividends,  and  interest  are  taxed,  as  well  as 
what  are  called  profits.  The  taxes  on  the  sale  of  strong 


248  THE  METHODS  OF  TAXATION 

drink  are  enormous;  they  may  amount  to  as  much  as 
all  the  profits  made  by  those  engaged  in  that  sale,  and  in 
a  sense  they  may  be  said  to  be  paid  out  of  those  profits. 
But  there  is  no  reason  to  suppose  that  such  persons  are 
content  with  any  less  rate  of  profit  than  persons  in  other 
occupations,  and  it  can  therefore  be  only  misleading  to 
speak  of  the  tax  on  the  sales  that  they  make  as  a  tax  on 
their  profits. 

In  this  connection  an  inordinately  litigated  matter,  the 
taxation  of  loans  secured  by  mortgages,  may  be  consid- 
ered. Like  the  two  knights  of  tradition,  the  defenders 
and  the  opponents  of  this  tax,  each  seeing  only  one  side 
of  the  shield,  have  necessarily  fought  a  entrance.  It 
admits  of  no  question  that  to  tax  a  mortgage  as  well 
as  the  property  which  is  pledged  for  the  payment  of  the 
mortgage,  is  in  some  sense  double  taxation.  Debts  form 
no  part  of  the  wealth  of  a  community.  Were  all  the  in- 
debtedness of  our  country  consolidated  into  an  issue  of 
government  bonds,  to  an  amount  equal  to  all  the  tangible 
wealth  of  the  inhabitants,  the  country  would  be  no  richer 
than  if  no  one  of  its  inhabitants  owed  a  penny.  The 
wealth  of  an  individual  is  ascertained  by  subtracting  his 
liabilities  from  his  assets.  If  he  mortgages  his  land  to 
secure  a  loan,  his  creditor  becomes  the  true  owner  of  the 
land,  subject  to  what  is  known  at  law  as  the  equity  of 
redemption  retained  by  the  borrower.  In  fact  a  mort- 
gage is  still  in  form  a  deed,  with  a  defeasance.  The 
mortgagor  remains  in  possession  of  the  land,  but  only  if 
he  pays  the  interest  on  what  he  has  borrowed,  failing 
which  the  mortgagee  takes  possession.  Of  course  there  is 
some  economic  gain  in  the  proceeding ;  men  borrow  money 
because  they  can  make  more  than  the  lenders  by  using  it. 


THE  DIFFUSION  OF  TAXES  249 

But  this  has  no  bearing  on  the  matter;  the  value  of  the 
land  is  practically  the  same,  whether  mortgaged  or  not. 
A,  who  owns  a  farm,  sells  it  to  B,  who  has  no  money,  for 
a  consideration  of  $5,000,  taking  B's  bond,  secured  by  a 
purchase-money  mortgage  of  the  farm,  for  the  payment 
of  that  sum.  Until  recently,  in  nearly  all  our  states,  A 
would  then  be  assessed  on  $5,000,  the  value  of  the  bond 
and  mortgage,  and  B  would  be  assessed  on  $5,000,  the 
value  of  the  farm.  No  value  has  been  created;  there  is 
only  the  farm,  but  the  assessment  has  been  doubled,  and 
double  taxation  results. 

There  is,  however,  a  certain  ambiguity  in  the  expression 
"  double  taxation."  For  let  us  suppose  that  all  the  wealth 
in  the  country  belonged  to  one  half  of  its  inhabitants,  and 
that  they  sold  it  to  the  other  half,  taking  back  mortgages 
for  its  full  value.  The  assessment  roll  of  the  country 
would  then  be  doubled,  but  the  taxes  would  be  the  same 
in  amount.  They  were  in  the  first  place  all  paid  by  the 
owners  of  the  wealth;  but  they  are  now  divided,  half 
being  paid  by  the  former  owners,  as  mortgagees,  half  by 
the  mortgagors,  the  present  owners.  There  would,  it  is 
true,  be  double  assessment ;  but  the  rate  of  taxation  would' 
be  only  one-half  what  it  was  before.  The  defenders  of 
the  tax  on  mortgages  would  maintain  that  an  equitable 
distribution  of  burdens  is  thus  provided.  The  taxes  paid 
by  the  owners  of  the  property  mortgaged  would  be  les- 
sened, and  those  paid  by  the  mortgagees  would  be  corre- 
spondingly increased.  And  it  must  be  said  that  this  is 
perfectly  consistent  with  the  theory  of  the  general  prop- 
erty tax.  If  all  property  is  taxed,  including  choses  in 
action,  or  claims  in  general,  then  by  whatever  amount  is 
collected  from  the  holders  of  claims,  the  amount  collected 


250  THE  METHODS  OF  TAXATION 

from  the  owners  of  the  property  affected  by  these  claims 
will  be  reduced.  If  the  general  property  tax  is  a  proper 
measure  of  taxation,  the  taxation  of  mortgages  is  not  only 
a  proper  but  an  essential  element  in  this  measure. 

But  here  the  principle  of  the  diffusion  of  taxes  may 
be  invoked.  Disregarding  the  existence  of  usury  laws  — 
they  are  almost  universally  evaded  where  they  do  exist 
—  the  lenders  of  money  may  decline  to  make  loans  if  they 
are  to  be  taxed  on  them ;  or,  what  is  the  same  thing,  they 
may  consent  to  make  them  only  if  the  borrower  will  pay 
the  tax,  or  pay  a  proportionately  higher  rate  of  interest. 
That  there  is  some  truth  in  this  contention  appears  from 
the  fact  that  many  legislatures  have  passed  laws  forbid- 
ding lenders  to  make  contracts  obligating  the  borrowers 
to  pay  such  taxes.  It  also  appears  from  the  fact  that 
where  such  laws  exist  the  rate  of  interest  on  mortgage 
loans  may  be  considerably  higher  than  that  on  others.1 
The  result  of  the  legislative  attempt  to  tax  the  lender 
would  thus  seem  to  be  to  throw  the  tax  backward  upon 
the  borrower.  As  the  borrower  is  already  taxed  on  his 
land,  he  may  well  deplore  the  well-meant  but  misdirected 
attempts  of  the  legislature  to  compel  his  creditors  to  share 
his  burdens.  To  this  it  may  be  replied  that  this  result 
takes  place  because  the  general  property  tax  is  not  en- 
forced; under  this  tax  all  other  loans,  and  not  those 
secured  by  mortgages  alone,  are  taxable.  Lenders,  there- 
fore, could  not  discriminate  against  mortgages.  All  their 
loans  would  be  taxable  at  the  same  rate,  no  matter  how 
secured,  even  if  not  secured  at  all.  The  lenders,  it  is 

1  Prof.  C.  Plehn  has  shown  from  the  records  of  savings  banks  in  San 
Francisco  that  for  many  years  the  rate  of  interest  on  mortgages  ex- 
ceeded that  on  most  other  loans  by  more  than  the  average  amount  of 
the  tax. 


THE  DIFFUSION  OF  TAXES  251 

true,  might  decline  to  lend,  preferring  to  use  their  capital 
themselves.  But  if  this  took  place  it  could  be  only  to 
a  limited  extent,  and  while  it  might  tend  to  raise  slightly 
the  rate  of  interest,  the  rise  would  not  be  equal  to  the  tax 
that  the  lenders  would  be  obliged  to  pay. 

To  this  the  reply  —  and  the  conclusive  reply  —  is  that 
the  general  property  tax  is  not  and  cannot  be  enforced. 
It  never  has  been,  it  is  not  now,  and  the  evidence  already 
presented  overwhelmingly  proves  that  there  is  no  prospect 
that  it  ever  will  be.  Assuming  the  tax  to  be  enforced  so 
far  as  it  applies  to  mortgages,  the  result  is  to  bring  the 
process  of  lending  and  borrowing  on  the  security  of  land 
into  the  category  of  taxed  employments,  while  much  of 
other  lending  and  borrowing  belongs  in  the  category  of 
untaxed  employments.  The  principle  stated  by  Adam 
Smith  therefore  applies;  nobody  will  lend  his  money  for 
less  interest  in  one  case  than  in  the  other.  And  the  corol- 
laries of  that  principle  also  apply,  so  that  the  ultimate 
result  of  this  tax  would  be  to  distribute  the  burden  through- 
out the  society.  We  have  seen,  however,  that  the  assump- 
tion that  the  tax  is  enforced  in  the  case  of  mortgages  is 
untenable;  only  a  portion,  and  a  small  portion,  of  such 
loans  is  actually  taxed.  As  this  portion  consists  largely 
of  loans  made  by  trustees  under  legal  compulsion,  the  tax 
upon  it  cannot  be  shifted,  and  must  be  borne  by  those 
helpless  and  unfortunate  persons  whose  property  is  man- 
aged under  the  guardianship  of  the  legislature.  The  effect 
on  the  rate  of  interest  of  such  conditions  would  probably 
be  too  small  to  be  traceable;  and  it  is  also  probable  that 
no  one  maintains  that  these  conditions  conform  to  any 
Standard  of  justice  whatever. 

What  is  true  of  the  general  property  tax  is  true,  in  the 


252  THE  METHODS  OF  TAXATION 

main,  of  the  income  tax.  As  Mr.  E.  Cannan  has  observed, 
the  effect  of  a  universal  ad  valorem  tax  on  all  kinds  of 
property  would  not  be  very  different  from  that  of  a  uni- 
versal income  tax.  In  one  case  as  well  as  the  other,  when 
the  tax  is  imposed  the  taxpayers  must  either  reduce  the 
amount  that  they  have  been  used  to  spend  for  goods  and 
services  by  the  amount  paid  to  the  government,  thus  les- 
sening demand;  or  curtail  their  savings,  thus  lessening 
the  quantity  of  capital  available  for  production  and  the 
payment  of  laborers.  It  is  true  that  the  income  tax  is, 
to  a  greater  extent  than  the  property  tax,  degressive ;  small 
incomes  are,  in  whole  or  in  part,  exempted.  To  a  certain 
extent,  therefore,  trade  carried  on  on  a  small  scale  is 
favored,  and  were  it  not  for  the  part  taken  by  corpora- 
tions, the  income  tax  might  be  raised  to  such  a  height 
as  to  drive  large  traders  out  of  business.  It  is  possible 
that  the  increase  in  the  number  of  corporations  may  be 
in  part  due  to  influences  of  this  nature.  The  gain  of  the 
small  traders,  however,  may  be  rather  fictitious  than  real ; 
the  economic  loss  to  the  whole  society  of  preventing  the 
most  productive  employment  of  capital  might  lessen  the 
real  gains  of  the  small  trader  by  more  than  the  amount 
of  his  apparent  gains  from  the  remission  of  his  taxes. 
However  this  may  be,  sufficient  evidence  has  perhaps 
been  presented  to  show  that  the  income  tax  is  subject 
to  the  same  objections  as  the  property  tax,  and  that  the 
inequality  of  sacrifice  that  it  causes  is  an  irremediable 
injustice. 

This  evidence  is  equally  conclusive  if  the  income  tax 
is  made  progressive,  although  in  this  case  it  is  not  so  clear 
that  the  tax  can  be  shifted  from  those  on  whom  it  is  im- 
posed. Were  eminent  physicians  and  lawyers  compelled 


THE  DIFFUSION  OF  TAXES  253 

to  pay  large  taxes  on  the  incomes  that  they  derive  from 
high  fees,  it  seems  probable  that  they  would  be  able  to 
obtain  still  higher  fees;  for  it  is  to  be  remembered  that 
the  increase  of  their  taxes  is  intended,  and  may  be  pre- 
sumed, to  lessen  the  taxes  of  the  rest  of  the  community. 
The  community  could  therefore  without  inconvenience  pay 
higher  fees  than  before,  and  such  fees  would  probably 
to  some  extent  be  exacted.  Professional  charges,  however, 
are  regulated  by  competition  much  less  than  the  prices 
of  goods,  and  it  is  impossible  to  state  any  very  definite 
conclusions  on  such  a  matter.  To  some  extent,  no  doubt, 
the  charges  of  distinguished  practitioners  are  moderated 
by  the  competition  of  less  known  members  of  their  pro- 
fession; but  when  the  issue  is  life  or  death,  or  the  title 
to  a  great  property,  men  are  not  disposed  to  haggle  over 
the  price  of  the  service,  or  to  spend  time  in  trying  to 
ascertain  where  they  can  procure  it  most  cheaply.  Much 
the  same  is  true  when  the  management  of  a  great  enter- 
prise is  in  question;  a  manager  who  has  the  ability  to 
make  it  succeed  may  be  worth  a  much  higher  salary  than 
he  demands. 

But  when  the  income  is  derived  from  investments,  it 
does  not  appear  how  a  progressive  tax  can  be  shifted.  In 
such  case  no  service  is  rendered  for  which  an  increased 
charge  can  be  made,  and  this  is  practically  the  only  way 
in  which  taxation  is  diffused.  Most  men  of  great  wealth, 
however,  by  no  means  content  themselves  with  the  income 
derived  from  their  investments;  they  are  constantly  en- 
gaging in  new  enterprises  that  promise  to  increase  their 
possessions.  The  power  of  concentrated  wealth  is  often 
beyond  the  control  of  competition;  it  may  fix  its  own 
rate  of  profit.  Were  these  masterful  men  compelled  to 


254  THE  METHODS  OF  TAXATION 

pay  very  high  income  taxes,  they  might  in  many  cases 
exact  them  from  the  community ;  they  might  in  some  cases 
prefer  to  abandon  enterprises  which  it  is  for  the  advan- 
tage of  the  community  to  have  succeed,  but  which  will 
not  be  undertaken  except  with  the  inducement  of  great 
prospective  gains.  But  we  need  not  pursue  this  subject 
further,  for  as  proportionate  taxation  dependent  on  self- 
assessment  is  notoriously  evaded,  progressive  taxation 
would  probably  be  evaded  even  more,  and  justice  be  even 
less  attained. 

Taxes  ad  valorem  on  commodities,  or  goods,  differ  from 
taxes  on  property  only  in  being  collected  at  irregular  in- 
tervals, and  therefore  at  no  determinate  rates.  Such 
taxes  may  be  assessed  and  collected  in  several  different 
ways.  Fees  may  be  charged  by  the  government  for  license 
or  permission  to  produce  certain  kinds  of  goods,  or  to 
sell  them  when  produced.  Licenses  to  sell  certain  kinds 
of  services,  such  as  those  rendered  by  physicians  or  law- 
yers, are  of  the  same  nature  as  licenses  to  deal  in  goods; 
and  the  same  is  true  of  requirements  that  compel  men 
proposing  to  engage  in  such  occupations  to  prepare  them- 
selves by  studying  for  a  term  of  years,  and  to  establish 
their  competency  by  passing  an  examination.  They  are 
all  elements  in  the  cost  of  rendering  the  services,  they 
must  be  calculated  by  those  proposing  to  render  them, 
they  require  the  expenditure  of  capital,  and  they  are 
repaid,  in  part  at  least,  by  the  price  paid  for  the  services 
by  those  who  buy  them.  For  several  reasons,  they  can- 
not be  calculated  with  the  same  accuracy  as  the  ele- 
ments in  the  cost  of  production  or  transfer  of  material 
goods,  but  the  difference  is  one  of  degree  and  not  of 
kind. 


THE  DIFFUSION  OF  TAXES  255 

As  has  been  pointed  out,  licenses  to  engage  in  a  par- 
ticular employment,  unless  ad  valorem  or  graduated  ac- 
cording to  the  quantity  or  value  of  the  goods  dealt  in,  are 
a  direct  discouragement  to  men  of  small  means.  Some 
attempt  is  made  by  the  British  government  to  graduate 
license  fees,  especially  in  the  case  of  dealers  in  alcoholic 
drinks;  but  the  attempt  is  imperfectly  successful,  and 
seems  not  to  have  been  imitated  in  this  country.  We  have 
here,  however,  very  marked  gradations  according  to  local- 
ity. License  fees  vary  extremely  between  different  states, 
and  between  different  towns  in  the  same  state.  They  are 
often  made  very  high  in  cities,  with  the  avowed  purpose, 
and  with  the  effect,  of  driving  men  of  small  capital  out 
of  the  liquor  business ;  it  being  apparently  supposed  that 
the  sale  of  strong  drink  on  a  large  scale  is  less  prejudicial 
to  morality  than  on  a  small  one.  The  effect  of  such 
licenses,  however,  must  be,  through  diminishing  the  num- 
ber of  competitors,  to  increase  the  profits  of  those  who 
continue  in  the  business;  and  there  is  no  reason  to  be- 
lieve that  the  different  rates  imposed  in  different  towns 
cause  any  other  difference  in  the  profits  of  those  who 
carry  it  on.  A  liquor-seller,  like  a  grocer,  will  not  engage 
in  business  in  a  small  town  unless  he  has  reason  to  believe 
that  he  can  make  as  much  money  there  as  in  a  large  city, 
and  whether  his  expenditure  be  for  a  license  or  for  the 
rent  of  his  shop,  he  will  sell  his  goods  at  such  a  price  as 
will  repay  him  and  give  him  the  ordinary  rate  of  profit 
beside. 

Licenses  to  produce  goods  of  a  certain  kind,  when  the 
government  supervises  the  production,  can  be  graduated 
according  to  the  quantity  produced,  as  is  done  in  the  case 
of  excise  taxes.  Such  taxes  may  be  regarded  as  taxes 


256  THE  METHODS  OF  TAXATION 

on  sales,  or  transfers  of  title.  When  the  excise  was  es- 
tablished in  England,  liquors  intended  for  the  consump- 
tion of  the  producer  and  his  family  were  exempted,  or 
taxed  at  a  lower  rate,  and  some  such  exemption  still  exists. 
But  it  is  impossible  to  prevent  goods  so  produced  from 
passing  into  consumption,  and  the  quantity  of  such  goods 
is  very  small  compared  with  the  quantity  produced  for 
sale.  Some  such  exemption  takes  place  in  France,  as  in 
the  case  of  the  production  of  what  is  known  as  cru;  and 
in  this  country  wine  and  cider  are  taxed  lightly,  if  at  all. 
In  both  cases,  political  considerations  are  influential.  On 
the  whole  it  seems  that  no  serious  error  can  result  if  we 
class  taxes  on  the  production  of  goods  with  taxes  on  trans- 
fers of  title.  Such  taxes  are  usually  imposed  on  what 
are  called  raw  materials,  or  goods  in  one  of  the  early 
stages  of  manufacture;  although,  in  the  case  of  the  ex- 
cise, they  may  be  repeated  at  several  stages.  In  this 
country  they  are  commonly  repeated  also  by  the  state 
governments,  and  every  drinking  place  displays  two  li- 
censes. By  whomsoever  they  are  advanced,  it  seems  to 
be  universally  understood  that  they  are  finally  paid  by 
the  consumer.  In  so  far  as  they  compel  the  use  of  large 
capitals,  they  tend  to  limit  competition  and  to  increase 
the  rate  of  profit. 

These  conclusions  are  confirmed  by  some  remarkable 
episodes  in  our  fiscal  history.  During  the  Civil  War,  dis- 
tilled spirits  were  for  the  first  time  for  many  years  sub- 
jected to  taxation  by  the  general  government.  The  tax 
first  imposed  was  20  cents  a  gallon.  It  did  not  apply 
to  spirits  already  produced,  and  the  owners  of  these  spirits 
promptly  advanced  the  price,  thus  securing  a  very  large 
sum  in  profits.  This  experience  was  so  satisfactory  that 


THE  DIFFUSION  OF  TAXES  257 

those  engaged  in  the  trade  welcomed  and  even  labored  to 
obtain  additional  taxes,  amounting  in  March,  1864,  to 
60  cents  a  gallon,  in  July  of  the  same  year  to  $1.50  a 
gallon,  and  in  January,  1865,  to  $2  a  gallon.  Evidence 
taken  before  the  Revenue  Commission  in  1865-66  showed 
that  there  was  in  January,  1864,  a  stock  of  spirits  on 
which  the  tax  had  been  paid,  large  enough  to  supply  the 
country  for  half  a  year,  and  that  on  this  stock  profits  of 
from  60  cents  to  $1.40  a  gallon  were  obtained.  It  seems 
clear  from  this  instance  that  the  imposition  of  a  tax  may 
be  highly  advantageous  to  those  engaged  in  an  industry, 
a  result  which  can  follow  only  if  they  are  able  to  shift 
the  tax  to  the  consumers  of  their  products. 

Another  instance  mentioned  by  Mr.  D.  A.  Wells,  is 
even  more  conclusive  on  this  point,  although  here  those 
engaged  in  the  taxed  employment  struggled  only  to  retain 
the  tax,  not  to  increase  it.  A  tax  on  matches  was  imposed, 
in  1864,  at  the  rate  of  one  cent  per  package  of  one  hun- 
dred or  less,  yielding  at  one  time  a  revenue  of  over 
$3,500,000  a  year.  This  sum  the  manufacturers  were 
required  to  advance  by  purchasing  and  affixing  on  every 
package  a  stamp  before  sale  was  permitted.  To  manu- 
facturers furnishing  their  own  design  for  the  stamp,  a 
discount  of  ten  per  cent  was  granted  on  purchases  amount- 
ing to  $500,  and  sixty  days'  credit  was  also  allowed  to 
those  offering  government  bonds  as  security  for  their  pay- 
ments. These  conditions  were  too  onerous  for  manufac- 
turers on  a  small  scale,  and  the  business  fell  into  the  hands 
of  a  few  concerns,  which  raised  the  retail  price  of  matches 
considerably  more  than  the  amount  of  the  tax.  When 
it  was  proposed,  in  1883,  to  abolish  the  tax,  these  manu- 
facturers struggled  vigorously  to  prevent  it.  They  did 

17 


258  THE  METHODS  OF  TAXATION 

not  succeed,  and  the  retail  price  fell  from  fifteen  cents 
for  six  packages  to  six  cents.1 

These  premises  seem  to  authorize  the  conclusion  that 
a  tax  on  the  sale  of  anything  is,  as  a  general  rule,  followed 
by  an  increase  in  the  price  for  which  the  thing  is  sold; 
but  whether  this  increase  in  price  will  be  equal  to,  or 
be  greater  or  less  than,  the  tax,  is  not  so  clear.  For 
reasons  that  have  been  stated,  a  tax  on  all  sales  would 
diminish  general  profits;  were  the  tax  adjusted  by  om- 
niscience, every  employment  would  be  equally  burdened, 
and  nothing  would  be  gained  by  changing  from  one  taxed 
employment  to  another.  ~No  such  adjustment,  however, 
is  within  the  capacity  of  any  legislature,  and  while  in  a 
few  cases  a  universal  tax  on  sales  has  been  enacted,  it 
has  been  enforced  —  so  far  as  it  was  enforced  at  all  — 
with  most  disastrous  results.  The  Alcavala  of  Spain  was 
a  tax  of  this  kind,  being  levied  on  the  sale  of  every  sort 
of  property,  and  repeated  every  time  the  property  was 
sold;  and  the  decline  of  that  country  has  been,  it  is  sup- 
posed, largely  due  to  the  ruinous  effects  of  this  tax.  When 
taxes  are  imposed  on  the  sale  of  certain  things  consumed 
in  large  quantities,  the  investment  of  capital  in  the  pro- 
duction of  those  things  tends  to  be  checked,  and  its  over- 
flow into  other  channels  would  tend  to  decrease  the  re- 
turns from  those  channels,  and  thus  cause  a  general 
distribution  of  the  burden.  To  a  certain  extent,  therefore, 
the  producers  of  the  taxed  articles  might  be  prevented 
from  raising  the  price  for  which  they  are  sold  by  the 
whole  amount  of  the  tax. 


1  The  repeated  increases  of  the  beer  duty  in  England  have  been  fol- 
lowed by  very  marked  decreases  in  the  number  of  brewers.  Their  num- 
ber is  scarcely  one-half  what  it  was  a  few  years  since. 


THE  DIFFUSION  OF  TAXES  259 

On  this  subject  Adam  Smith  and  other  writers  of  his 
time  made  some  statements  that  seem  to  have  been  re- 
garded by  most  subsequent  writers  as  axiomatic,  and  that 
are  constantly  repeated  at  the  present  day.  They  are, 
nevertheless,  not  free  from  error,  and  should  be  consid- 
ered in  the  light  of  the  criticism  of  Ricardo.  It  was 
asserted  by  Adam  Smith  that  taxes  on  wages,  or  on  the 
necessaries  of  life  consumed  by  laborers,  would  cause 
wages  to  rise,  and  that  the  increase  of  wages  would  be 
recovered  by  the  employer,  "  who  would  be  entitled  and 
obliged  to  charge  it  with  a  profit  upon  the  price  of  his 
goods."  Upon  this  Eicardo  observes  that  as  according 
to  Adam  Smith's  supposition  corn  would  not  be  raised 
in  price,  while  manufactured  goods  would  be,  manufac- 
turers would  be  benefited  and  not  injured  by  such  a  tax. 
He  demonstrated  that  the  tax  would  fall  on  the  profits  of 
stock,  for  manufacturers  could  not  increase  the  price  of 
their  goods.  This  is  in  harmony  with  his  general  doc- 
trine that  "  profits  are  the  leavings  of  wages  " ;  and  he 
expressed  the  opinion  that  except  in  the  immediate  effects 
it  made  little  difference  whether  the  profits  of  stock  or 
the  wages  of  labor  were  taxed.  He  applied  the  same 
criticism  to  the  assertion  that  such  taxes  were  repeated 
and  accumulated  four  or  five  times.  According  to  Adam 
Smith : 

"  In  the  price  of  leather  .  .  .  you  must  pay,  not  only  for  the 
tax  upon  the  leather  of  your  own  shoes,  but  for  a  part  of  that 
upon  those  of  the  shoemaker  and  the  tanner.  You  must  pay, 
too,  for  the  tax  upon  the  salt,  upon  the  soap,  and  upon  the 
candles,  which  those  workmen  consume  while  employed  in 
your  service,  and  for  the  tax  upon  the  leather  which  the  salt- 
maker,  the  soap-maker,  and  the  candle-maker  consume,  while 
engaged  in  their  service." 


260  THE  METHODS  OF  TAXATION 

To  this  Ricardo  replies  that  as  neither  of  these  per- 
sons will  be  benefited  by  the  tax  on  leather,  etc.,  and  as 
the  government  will  receive  no  more  than  the  tax  imposed, 
it  is  impossible  to  conceive  that  more  can  be  paid  by  the 
public  upon  whomsoever  the  tax  may  fall.  He  further 
illustrates  his  position  by  his  comment  on  M.  Say's  as- 
sertion that  as  when  Turgot  reduced  the  market  dues  on 
fish  sold  in  Paris  by  one-half  without  reducing  the  reve- 
nue from  those  dues,  the  consumption  of  fish  must  have 
doubled,  and  the  profits  of  fishermen  and  those  engaged 
in  the  trade  must  have  doubled,  thereby  increasing  the 
income  of  the  country  by  the  whole  amount  of  these  in- 
creased profits.  Of  this  Ricardo  says,  these  profits  could 
have  doubled  only  as  the  result  of  withdrawing  capital 
and  labor  from  other  trades,  where  they  were  already 
profitably  employed.  The  real  gain  to  accumulation  was 
measured  "  by  the  difference  between  the  profits  obtained 
in  the  business  in  which  the  capital  was  newly  engaged, 
and  those  obtained  in  that  from  which  it  was  withdrawn." 

An  error  of  more  importance  is  that  of  some  modern 
writers  who  have  maintained  that  when  a  tax  was  im- 
posed on  raw  materials,  the  tax  was  increased  to  a  very 
great  extent  by  the  repeated  profits  made  on  it  by  dealers. 
It  is  no  doubt  true,  as  M.  Say  stated,  and  as  Ricardo 
admitted,  that  the  dealers  and  manfacturers  through  whose 
hands  the  material  may  successively  pass,  must  employ 
greater  funds  in  having  to  advance  the  tax,  which  may 
often  be  difficult  for  a  person  of  very  limited  capital  and 
credit.  But  Ricardo  did  not  admit  that  the  profits  on 
the  tax  advanced  must  also  be  charged  to  the  consumer, 
and  that  this  additional  tax  is  one  from  which  the  treasury 
derives  no  advantage.  The  error  arises  from  disregarding 


THE  DIFFUSION  OF  TAXES  261 

the  fact  that  when  we  speak  of  a  rate  of  interest  we  mean 
the  interest  for  a  year,  whereas  profits  are  calculated  on 
the  capital  employed  in  a  transaction,  even  if  it  is  com- 
pleted in  a  month  or  a  day.  It  is  impossible  to  explain 
the  matter  more  briefly  or  more  lucidly  than  Ricardo  has 
done  in  the  following  passage: 

"  M.  Simonde,  in  his  excellent  work,  De  La  Richesse  Com- 
merciale,  following  the  same  line  of  argument  as  M.  Say,  has 
calculated  that  a  tax  of  4,000  francs,  paid  originally  by  a 
manufacturer,  whose  profits  were  at  the  moderate  rate  of 
10  per  cent,  would,  if  the  commodity  manufactured  only 
passed  through  the  hands  of  five  different  persons,  be  raised 
to  the  consumer  to  the  sum  of  6,734  francs.  This  calculation 
proceeds  on  the  supposition,  that  he  who  first  advanced  the 
tax  would  receive  from  the  next  manufacturer  4,400  francs, 
and  he  again  from  the  next,  4,840  francs ;  so  that  at  each  step 
10  per  cent  on  its  value  would  be  added  to  it.  This  is  to  sup- 
pose that  the  value  of  the  tax  would  be  accumulating  at  com- 
pound interest;  not  at  the  rate  of  10  per  cent  per  annum, 
but  at  an  absolute  rate  of  10  per  cent  at  every  step  of  its 
progress.  This  opinion  of  M.  Simonde  would  be  correct,  if 
five  years  elapsed  between  the  first  advance  of  the  tax  and 
the  sale  of  the  taxed  commodity  to  the  consumer;  but  if  one 
year  only  elapsed,  a  remuneration  of  400  francs,  instead  of 
2,734,  .would  give  a  profit  at  the  rate  of  10  per  cent  per  an- 
num to  all  who  had  contributed  to  the  advance  of  the  tax, 
whether  the  commodity  had  passed  through  the  hands  of  five 
manufacturers  or  fifty.'*' 

Most  things,  perhaps,  are  consumed  within  a  year  from 
the  time  when  they  began  to  be  prepared  for  consump- 
tion; but  many  substances  become  instruments  of  pro- 
duction, and  may  last  a  long  time  before  they  are  worn 
out.  Certain  things  are  not  fit  to  be  used  until  ripened 
by  time;  some  must  undergo  many  processes  before  they 


262  THE  METHODS  OF  TAXATION 

reach  the  final  stage.  In  such  cases  some  governments 
endeavor  to  confine  their  taxation  to  this  final  stage,  and 
the  permission  to  store  goods  in  warehouses  under  gov- 
ernmental control  which  is  now  usually  extended,  is  in 
furtherance  of  this  purpose.  Spirits  intended  to  be  drunk 
should  lie  for  four  years  before  use,  during  which  time 
there  is  great  loss  from  evaporation.  To  exact  the  duty 
on  them  as  soon  as  they  were  produced,  would  not  only 
burden  the  consumer  with  the  accumulated  interest  on 
the  tax  on  what  he  consumed  but  would  tax  him  on  what 
had  never  reached  him.  The  cost  of  producing  a  gallon 
of  whiskey  is  perhaps  not  over  twenty  cents,  and  the  tax 
is  more  than  five  times  that  sum.  One-fifth  of  a  gallon, 
the  ordinary  contents  of  a  "  quart "  bottle,  may  be  sold 
for  a  dollar  or  more.  When  the  price  of  anything  is  ad- 
vanced to  such  an  enormous  extent,  it  is  certainly  reason- 
able to  postpone  the  collection  of  the  tax  until  the  goods 
are  withdrawn  from  storage,  and  to  collect  it  only  on  the 
amount  actually  withdrawn.  It  seems  to  be  universally 
admitted  that  the  consumers  pay  this  heavy  taxation; 
but  some  part  of  it  may  be  shifted  back  on  the  producers 
of  the  grain  used  by  distillers,  as  the  demand  for  their 
products  cannot  be  so  great  as  it  would  be  were  there 
no  tax  on  spirits. 

From  the  foregoing  considerations  it  would  seem  that 
taxes  are  diffused  according  to  the  general  law  that  profits, 
including  under  the  term  all  returns  to  labor  and  capital, 
tend  to  be  equalized.  This  law,  however,  implies  not 
only  freedom  of  competition  but  also  an  unlimited  supply 
of  materials  at  a  constant  price.  It  assumes  that  manu- 
factured goods,  for  example,  can  be  produced  in  greater 
or  less  quantities  with  proportionate  cost.  But  this  is 


THE  DIFFUSION  OF  TAXES  263 

not  true  of  land.  Its  quantity  can  only  with  great  dif- 
ficulty be  increased;  and,  in  the  great  centers  of  trade 
it  is  very  sharply  limited.  What  is  of  especial  importance, 
different  pieces  of  land  have  very  different  advantages, 
whether  of  fertility  or  situation;  from  which  arises  the 
phenomenon  of  rent.  Rent  is  the  price  paid  for  the  use 
of  land  from  which  more  than  ordinary  profit  can  be 
derived.  So  wise  a  man  as  Adam  Smith,  influenced  by 
the  Physiocrats,  held  that  there  was  no  land  that  did  not 
yield  some  rent,  but  Ricardo  declared  that  much  land  in 
cultivation  produced  only  enough  to  give  the  ordinary 
return  to  capital,  and  that  nobody  could  afford  to  pay 
rent  for  it.  Those  who  wish  to  cultivate  better  lands 
must  pay  a  rent  equal  to  the  excess  of  their  product  over 
that  of  the  inferior  lands.  -  They  can  make  more  by  the 
use  of  such  lands,  and  they  can  afford  to  pay  more. 

If  a  tax  is  levied  on  ground  rent,  it  seems  to  be  uni- 
versally admitted,  the  landlords  alone  pay  it.  The  tax 
is  not  paid  by  those  using  the  lowest  grade  of  land,  as  it 
bears  no  rent ;  and  if  those  using  the  higher  qualities  paid 
it,  they  would  be  making  less  profit  than  those  who  paid 
no  rent.  It  is  true  that  the  landlords  cannot  accumulate 
so  much,  or  spend  so  much,  as  before,  and  to  a  slight 
extent  the  tax  may  be  thus  diffused.  The  extent  would 
be  so  slight  as  to  be  negligible;  and  on  the  assumption 
that  landlords  are  charging  all  the  rent  that  their  land 
will  bear,  it  seems  clear  that  any  additional  burden  on 
the  land  cannot  be  shifted  from  them.  Of  course,  where 
rents  are  rapidly  rising,  they  may  not  be  positively  re- 
duced by  taxation,  but  they  will  be  relatively  reduced. 
They  may  continue  to  rise,  but  not  to  the  height  to  which 
they  would  have  risen.  It  would  seem  then  that  rent 


264  THE  METHODS  OF  TAXATION 

is  a  peculiarly  fit  subject  for  taxation  according  to  the 
progressive  method.  As  Adam  Smith  observed,  it  is  "  a 
species  of  revenue  which  the  owner,  in  many  cases,  en- 
joys without  any  care  or  attention  of  his  own.  Though 
a  part  of  this  revenue  should  be  taken  from  him  in  order 
to  defray  the  expenses  of  the  State,  no  discouragement 
will  thereby  be  given  to  any  sort  of  industry.  The  annual 
produce  of  the  land  and  labor  of  the  society,  the  real 
wealth  and  revenue  of  the  great  body  of  the  people,  might 
be  the  same  after  such  a  tax  as  before.  Ground  rents 
and  the  ordinary  rent  of  land  are,  therefore,  perhaps,  the 
species  of  revenue,  which  can  best  bear  to  have  a  peculiar 
tax  imposed  upon  them."  The  obstacles  in  the  way  of 
applying  such  a  tax,  however,  are  very  serious.  They 
have  been  considered  at  length  in  a  preceding  chapter, 
and  it  is  only  necessary  to  refer  to  the  enormously  wide 
diffusion  of  the  ownership  of  land,  either  directly,  or 
by  mortgage  or  other  charge ;  to  the  impossibility  of  sepa- 
rating the  value  of  land  due  to  the  expenditure  of  the 
owners  from  its  value  due  to  other  causes;  and  to  the 
vast  extent  of  the  "  unearned  increment "  in  other  prop- 
erty as  well  as  land. 

House  rent  may  be  divided  into  two  parts :  the  ground 
rent,  and  the  building  rent  The  latter  is  regulated  by  the 
same  principles  that  regulate  the  gains  made  in  any  em- 
ployment. If  houses  cannot  be  rented  for  enough  to  make 
it  profitable  to  build  them,  they  will  not  be  built.  The 
builder  will  consider  what  the  taxes  will  be  on  the  com- 
pleted house,  just  as  he  considers  what  he  will  have  to  pay 
for  materials  and  labor,  and  if  the  whole  expense  is  likely 
to  be  so  great  as  to  leave  him  less  profit  than  he  can  make  in 
some  other  business,  he  will  not  engage  in  building.  Pro- 


THE  DIFFUSION  OF  TAXES  265 

vided  he  can  obtain  a  sufficient  rent,  it  makes  no  difference 
to  him  whether  taxes  are  high  or  low,  or  whether  materials 
and  labor  are  high  or  low.  But  the  ability  of  the  tenant 
to  pay  rent  is  limited,  and  he  may  be  affected  by  a  tax  on 
rent  as  he  is  affected  by  a  tax  on  any  necessary  of  con- 
sumption. If  a  tax  on  houses  is  imposed,  that  part  which 
falls  on  the  ground  rent,  it  seems  to  be  admitted,  will  be 
paid  by  the  landlords;  but  that  part  which  falls  on  the 
building  rent  might  be  partly  paid  by  the  tenant.  Were 
there  no  compressibility  in  human  beings,  the  tenants 
might  indeed  pay  the  whole  tax.  Men  must  have  shelter, 
and  if  all  existing  shelter  is  taken,  there  seems  nothing  to 
do  but  to  pay  more  rent,  if  more  is  demanded.  In  fact, 
however,  population  is  very  compressible,  and  there  are 
always  some  vacant  tenements.  Some  men  would  prefer 
to  live  in  smaller  houses,  or  in  lodgings,  rather  than  pay 
more  rent;  and,  taken  as  a  whole,  the  population  might 
be  accommodated  in  cheaper  quarters.  But  rather  than 
have  the  better  class  of  houses  vacant  the  landlords  would 
lower  their  rent,  and  the  same  might  take  place  down  to 
the  lowest  class  of  tenement.  In  a  decaying  town,  all  taxes, 
it  might  be  said,  must  fall  on  the  landlords;  but  in  an 
improving  town  they  may  be  able  to  recover  them  at  once 
out  of  the  increasing  value  of  their  land  and  the  greater 
rents  that  they  are  constantly  enabled  to  charge.  But  the 
principle  is  unaffected  that  whatever  discourages  building 
in  any  place  tends  to  lessen  the  demand  for  unused  land, 
and  this  decrease  in  the  value  of  land  decreases  also  the 
discouragement  to  investment. 

As  has  been  observed,  the  fact  that  taxes  are  higher  in 
one  town  than  in  another  makes  no  difference  with  the 
profits  of  builders;  there  will  always  be  some  building 


266  THE  METHODS  OF  TAXATION 

to  be  done,  the  most  profitable  jobs  will  be  taken  first,  and 
the  least  profitable  ones  must  yield  the  marginal  return, 
which  would  be  substantially  the  same  in  both  towns.  But 
a  difference  in  the  rate  of  taxation  may  cause  a  redistribu- 
tion of  capital  that  cannot  be  affected  without  some  loss  to 
the  whole  society;  the  differential  tax  is  subtracted  from 
the  price  of  the  differential  advantage  of  situation  for 
which  the  tenant  pays,  but  there  may  be  some  loss  from 
friction  in  the  process.  Allowing  for  friction,  it  would 
seem  to  be  true  that  a  general  tax  on  real  estate  would  have 
about  the  same  effect  on  the  distribution  of  wealth  as  a  tax 
on  all  forms  of  property.  The  owners  of  personal  property 
would  for  a  time  get  some  profit  from  exemption;  but  if 
capital  were  driven  out  of  the  building  trades  the  effect 
would  be  to  diminish  the  rate  of  profit  in  the  industries 
into  which  it  made  its  way.  Were  it  possible  to  tax  per- 
sonal property  effectively,  landlords  would  have  to  bear 
a  part  of  the  burden,  on  the  principle  that  ,if  less  can  be 
made  by  the  use  of  land  less  will  be  paid  for  it;  but  the 
nature  of  personal  property  is  such  that  no  general  tax  on 
it  can  be  collected. 

In  treating  of  taxes  on  expense  it  was  observed  that 
taxes  on  house  rent  required  more  particular  consideration 
than  could  then  be  advantageously  given  them.  On  this 
subject  the  sagacious  comments  of  Adam  Smith  remain 
unchallenged;  they  are  as  true  now  as  when  they  were 
made,  and  there  is  as  little  to  add  to  them  as  to  take  away 
from  them.  They  are  substantially  as  follows: 

"  The  rent  of  houses,  though  it  in  some  respects  resembles 
the  rent  of  land,  is  in  one  respect  essentially  different  from  it. 
The  rent  of  land  is  paid  for  the  use  of  a  productive  subject. 
The  land  which  pays  it  produces  it.  The  rent  of  houses  is 


THE  DIFFUSION  OF  TAXES  267 

paid  for  the  use  of  an  unproductive  subject.  Neither  the  house 
nor  the  ground  which  it  stands  upon  produce  anything.  The 
person  who  pays  the  rent,  therefore,  must  draw  it  from  some 
other  source  of  revenue,  distinct  from  and  independent  of  this 
subject.  A  tax  upon  the  rent  of  houses,  so  far  as  it  falls  upon 
the  inhabitants,  must  be  drawn  from  the  same  source  as  the 
rent  itself,  and  must  be  paid  from  the  revenue,  whether  de- 
rived from  the  wages  of  labor,  the  profits  of  stock,  or  the  rent 
of  land.  So  far  as  it  falls  upon  the  inhabitants,  it  is  one  of 
those  taxes  which  fall,  not  upon  one  only,  but  indifferently 
upon  all  the  three  different  sources  of  revenue;  and  it  is  in 
every  respect  of  the  same  nature  as  a  tax  upon  any  other  sort 
of  consumable  commodities.  In  general  there  is  not,  perhaps, 
any  one  article  of  expense  or  consumption  by  which  the  lib- 
erality or  narrowness  of  a  man's  whole  expense  can  be  better 
judged  of,  than  by  his  house  rent.  .  .  .  The  proportion  of  the 
expense  of  house  rent  to  the  whole  expense  of  living  is  differ- 
ent in  the  different  degrees  of  fortune.  It  is  perhaps  highest  in 
the  highest  degree,  and  it  diminishes  gradually  through  the 
inferior  degrees,  so  as  in  general  to  be  lowest  in  the  lowest 
degree.  The  necessaries  of  life  occasion  the  great  expense  of 
the  poor.  They  find  it  difficult  to  get  food,  and  the  greater  part 
of  their  little  revenue  is  spent  in  getting  it.  The  luxuries  and 
vanities  of  life  occasion  the  principal  expense  of  the  rich ;  and 
a  magnificent  house  embellishes  and  sets  off  to  the  best  ad- 
vantage all  the  other  luxuries  and  vanities  which  they  possess. 
A  tax  upon  house  rents,  therefore,  would  in  general  fall  heavi- 
est upon  the  rich ;  and  in  this  sort  of  inequality  there  would 
not,  perhaps,  be  anything  very  unreasonable.  It  is  not  very 
unreasonable  that  the  rich  should  contribute  to  the  public 
expense,  not  only  in  proportion  to  their  revenue,  but  some- 
thing more  than  in  that  proportion."  Wealth  of  Nations, 
Book  V,  CHAP.  XI,  Part  II,  Art.  I.1 

1  Later  writers  have  concurred  in  this  judgment.  John  Mill  ob- 
serves: "No  part  of  a  person's  expenditure  is  a  better  criterion  of  his 
means,  or  bears  on  the  whole  more  nearly  the  same  proportion  to  them. 
A  house  tax  is  a  nearer  approach  to  a  fair  income  tax  than  a  direct  assess- 
ment on  income  can  easily  be :  having  the  great  advantage  that  it  makes 


268  THE  METHODS  OF  TAXATION 

A  tax  of  this  description,  it  would  seem,  cannot  be 
shifted  to  any  great  extent.  If  the  occupants  of  very  costly 
houses  owned  them,  they  would  pay  the  tax  on  the  ground 
rent  as  landlords,  and  on  the  houses  a&  consumers.  When 
they  do  not  own  them,  they  may  perhaps  in  many  cases 
insist  that  the  landlord  should  pay  a  part  of  the  tax,  if 
not  all  of  it;  and,  rather  than  have  the  house  vacant,  the 
landlord  might  yield  to  the  demand.  He  is  presumed  to 
exact  the  highest  possible  rent,  and  the  tenant  may  decline 
to  bear  any  additional  charge.  But  as  houses  of  this  de- 
scription are  exceptionally  costly,  the  ground  rent  is  often 
a  small  part  of  the  gross  rent  when  compared  with  that  of 
the  building.  The  house  is  intended  to  be  luxurious,  and 
to  impress  the  world  with  its  magnificence;  often,  it  may 
be  thought,  to  cause  astonishment  at  its  lavish  extrava- 
gance. A  tax  on  the  rent  of  such  a  house  is  in  some 
respects  like  a  tax  on  any  other  expensive  luxury ;  it  may 
tend  to  decrease  the  demand  for  the  luxury  by  reducing 
the  number  of  those  who  are  able  or  willing  to  afford  it. 
It  would  probably  do  so  in  times  of  financial  distress ;  but 
with  the  return  of  prosperity  the  demand  would  revive. 
The  case  is  peculiar  in  that  the  motive  is  ostentation ;  men 
wish  to  display  their  opulence.  They  cannot  well  display 
it  in  any  other  way,  for  the  "  luxuries  and  vanities  "  that 
they  possess  would  make  them  ridiculous  if  placed  in  a 
mean  abode.  He  who  lives  in  such  an  abode  is  apt  to  be 

spontaneously  all  the  allowances  which  it  is  so  difficult  to  make,  and  so 
impracticable  to  make  exactly,  in  assessing  an  income  tax;  for,  if  what 
a  person  pays  in  house  rent  is  a  test  of  anything,  it  is  a  test  not  of  what 
he  possesses,  but  of  what  he  thinks  he  can  afford  to  spend."  Prof.  A. 
Marshall  asserts  that  those  who  live  in  expensive  houses  are  just  those 
who  now  pay  less  than  their  fair  share  to  the  expense  of  the  country; 
they  might  be  made  to  pay  very  high  rates  on  their  houses.  He  sug- 
gests a  progressive  rate,  rising  from  4s.  in  the  pound  to  10s. 


THE  DIFFUSION  OF  TAXES  269 

thought  unable  to  afford  a  better  one;  he  cannot  expect 
fashionable  people  to  visit  him,  and  the  women  of  his 
family  will  be  discontented  with  their  position.  If  he  is 
known  to  be  rich,  he  will  be  despised  for  being  penurious, 
and  he  can  derive  but  a  miserly  enjoyment  from  his  riches. 
The  payment  of  a  high  tax  upon  an  expensive  house  thus 
becomes  an  additional  sign  of  great  wealth,  and  the  desire 
to  display  wealth  is  too  strong  to  be  overcome  by  the  reflec- 
tion that  it  will  cost  much  money  to  display  it.1 

It  is  no  objection  to  such  a  tax  that,  like  a  tax  on  any 
other  luxury,  it  can  be  evaded  by  self-denial.  Rather  than 
pay  it,  some  men  will  choose  to  inhabit  cheap  houses  in 
unfashionable  quarters,  and  to  be  looked  down  upon  as 
either  poor  or  penurious.  Persons  of  this  unpopular  class, 
however,  are  precisely  those  whom  it  is  not  advantageous 
for  the  community  to  tax.  '  Their  savings  maintain  that 
great  fund  of  capital  which  is  the  life-blood  of  modern 
industry.  What  is  taken  from  those  whose  vanity  leads 
them  to  build  luxurious  houses,  is  taken  from  a  fund  which, 
so  far  as  producing  wealth  is  concerned,  would  be  wasted 
in  extravagant  living.  What  is  taken  from  the  parsi- 
monious is  taken  from  a  fund  which  employs  productive 
labor,  and  adds  to  the  wealth  of  the  community.  It  is  com- 
mon to  condemn  ostentatious  luxury,  and  it  is  equally  com- 
mon to  sneer  at  those  who  abstain  from  such  luxury  when 
they  can  afford  to  indulge  in  it;  but,  if  it  is  an  evil,  to 
relinquish  it  is  commendable,  and  whatever  revenue  from 
taxes  on  such  luxury  the  government  might  lose  by  absten- 
tion, would  be  more  than  made  up  for  by  the  increase  of 

1  When  the  income  tax  was  levied  in  this  country,  the  returns  being 
published,  it  was  said  that  many  persons  gave  in  their  incomes  as  much 
larger  than  they  really  were.  They  were  willing  to  pay  a  premium  for 
the  distinction  of  being  reputed  wealthy. 


270  THE  METHODS  OF  TAXATION 

that  fund  from  which  its  chief  revenue  must  be  derived, 
to  say  nothing  of  the  gain  in  moral  welfare  from  more 
modest  living. 

A  universal  tax  on  house  rent  would  conform  more 
nearly,  perhaps,  to  the  requirements  of  the  proportionate 
method  than  any  other  tax  that  can  be  devised.  Like  all 
these  taxes,  however,  it  would  be  unequal  because  of  the 
unequal  needs  of  different  individuals.  A  physician  in 
good  practice,  for  example,  must  ordinarily  live  in  a  good 
neighborhood;  his  patients  demand  prompt  attendance, 
and  he  must  live  where  they  can  easily  find  him.  What 
with  other  men  is  ostentation  may  be  with  him  a  necessity ; 
and  as  his  expense  for  house  rent  seems  unavoidably 
greater  than  that  of  other  men  having  equal  incomes,  a  tax 
upon  it  would  be  exceptionally  onerous.  Even  in  this 
case  the  tax  might  after  a  time  be  shifted  by  means  of  in- 
creased fees ;  but  the  proportionate  method,  as  exemplified 
in  practice,  ignores  the  diffusion  of  taxes.  A  more  serious 
inequality  arises  from  variations  in  age,  in  health,  and  in 
the  size  of  families.  An  unmarried  man  needs  incur  no 
great  expense  for  house  rent,  and  a  tax  on  this  expense 
might  cause  him  no  inconvenience.  But  a  man  who  has 
given  hostages  to  fortune  is  in  a  very  different  condition, 
which  he  could  not  improve  by  shifting  the  tax.  Like 
the  English  tax  on  windows,  such  a  tax  might  thus  seri- 
ously affect  the  health  of  the  community,  and  operate  to 
discourage  marriage.  Even  here,  therefore,  the  propor- 
tionate method  seems  not  to  conform  much  better  to  tho 
demands  of  justice  than  in  the  other  instances  in  which  it 
has  been  applied. 

These  difficulties  do  not  occur,  or  are  less  serious,  if  the 
tax  on  house  rents  is  made  progressive,  and  it  is  remark- 


THE  DIFFUSION  OF  TAXES  271 

able  that  the  advocates  of  the  progressive  method  have  paid 
so  little  attention  to  this  tax.  Adam  Smith  expressed  sur- 
prise that  it  had  been  so  seldom  applied,  and  there  has 
been  little  change  since  he  wrote.  The  British  govern- 
ment, it  is  true,  levies  a  tax  on  inhabited  houses  that  is 
moderately  progressive.  Houses  renting  for  less  than  £20 
are  exempted,  those  renting  at  a  higher  rate  up  to  £40  are 
taxed  2d.  and  3d.  in  the  pound,  those  from  £40  to  £60  are 
taxed  4d.,  and  all  above  £60  are  taxed  6d.  in  the  pound. 
Like  the  income  tax,  this  duty  is  rather  degressive  than 
progressive,  and  certainly  falls  with  no  peculiar  weight 
on  the  very  rich.  It  is,  however,  the  only  tax,  the  death 
taxes  to  a  certain  degree  excepted,  by  which  the  progressive 
method  can  be  applied  without  evident  injustice.  It  is 
free  from  the  objections  to  self-assessment,  it  involves  little 
vexation  or  inquisition,  it  can  be  graduated  so  as  to  cause 
no  suffering  to  persons  of  moderate  wealth,  it  can  be  col- 
lected with  little  cost,  and  it  is  paid  by  those  who  choose 
rather  to  pay  it  than  to  dimmish  their  ostentatious  expend- 
iture. It  has  all  the  advantages  in  fact  which  the  income 
tax  has  only  in  theory,  and  avoids  most  of  the  injustice 
which  that  tax,  as  actually  levied,  occasions.  Such  in- 
equality as  it  may  create  can  be  reduced  to  a  minimum 
by  judicious  exemptions;  and  some  inequality,  it  must 
be  remembered,  is  inseparable  from  human  life,  and  from 
all  taxation.  With  proper  graduation,  this  tax  would 
seem  more  than  any  other  to  afford  that  equality  of  oppor- 
tunity which  justice  is  thought  to  demand;  for,  while  it 
furnishes  revenue  to  the  government,  it  obtains  much  of 
it  from  the  profusion  of  the  extravagant,  and  at  the  same 
time  enables  the  parsimony  of  the  frugal  to  accumulate 
the  wealth  on  which  the  prosperity  of  the  society  depends. 


272  THE  METHODS  OF  TAXATION 

The  taxation  of  monopolies  might  properly  be  consid- 
ered here,  as  it  must  of  course  be  affected  by  the  causes 
that  operate  to  diffuse  taxation.  That  subject,  however, 
has  become  much  confused  in  the  course  of  recent  discus- 
sion; and,  before  it  can  be  disposed  of,  some  popular 
opinions  will  require  examination.  It  is  enough  here  to 
point  out  the  distinction  between  monopolists  and  monopo- 
lies. A  monopoly  may  be  the  property  of  a  great  many 
people,  none  of  whom  has  any  large  share  of  it.  In  such  a 
case  there  could  be  no  application  of  the  progressive  the- 
ory; and  without  making  taxation  disproportionate,  no 
additional  tax  perhaps  could  be  laid  on  the  monopoly. 
Both  the  proportional  and  the  progressive  methods  have 
reference  to  the  property  of  individual  men;  but  unless 
a  monopoly  is  owned  by  a  single  man,  or  by  a  few  men  in 
equal  shares,  a  tax  upon  it  would  affect  individuals  very 
unequally.  For  this,  and  some  other  reasons,  it  seems  de- 
sirable to  consider  taxation  of  this  sort  in  connection  with 
the  economic  method. 

A  review  of  the  facts  and  principles  above  set  forth 
seems  to  justify  the  conclusion  that  taxes,  as  a  rule,  are 
not  peculiarly  burdensome  to  those  who  actually  pay  them 
to  the  government ;  even  when  the  intent  of  the  legislature 
is  clear  that  they  shall  fall  on  certain  persons,  they  often 
fall  elsewhere.  Had  it  not  been  demonstrated  that  the 
attempts  made  in  this  country  to  apply  the  proportionate 
method  had  completely  failed  of  their  design,  the  prin- 
ciples governing  the  diffusion  of  taxes  would  show  that 
such  attempts  would  in  any  event  fail.  The  forces  operat- 
ing to  bring  about  the  existing  distribution  of  wealth  seem 
too  powerful  to  be  overcome  by  legislation;  partly,  it  is 
proper  to  observe,  because  much  of  our  legislation  is  of  a 


THE  DIFFUSION  OF  TAXES  273 

kind  to  maintain  the  present  distribution,  while  some  of 
it  is  even  designed  to  create  or  increase  those  inequalities 
which  excite  legislative  attempts  at  their  removal.  To  a 
certain  extent  this  conclusion  must  be  modified  in  speak- 
ing of  the  progressive  method ;  there  are  taxes  that  can  be 
made  to  reduce  the  wealth  or  income  of  designated  indi- 
viduals. We  have  had  few  progressive  taxes  hitherto  in 
this  country,  and  such  experience  as  we  have  had  with 
them  is  of  little  value.  The  present  English  system  per- 
haps carries  the  method  as  far  as  is  prudent ;  two-thirds  of 
the  income  of  the  English  people  is  exempted  from  income 
tax,  and  the  death  duties  are  chiefly  paid  by  the  larger 
estates.  But  the  equalization  of  wealth  which  is  aimed 
at  by  this  system,  it  can  hardly  be  doubted,  is  to  some 
extent  defeated  by  the  shifting  of  the  taxes.  It  is  even 
probable  that  it  is  defeated  to  a  large  extent;  for,  to  the 
astonishment  of  some  of  those  most  competent  to  judge 
of  such  matters,  there  are  signs  that  the  former  rate  of 
increase  in  the  number  and  in  the  size  of  large  estates  tends 
still  to  continue.1 

In  view  of  the  injustice  that  seems  to  be  inseparable 
from  the  existing  attempts  to  apply  either  the  proportion- 
ate or  the  progressive  method,  as  well  as  of  the  uncertainty 
in  the  results  of  those  attempts  due  to  the  diffusion  of 

1  The  products  both  of  Sir  W.  Harcourt's  death  duties  and  of  the 
increased  income  tax  have  been  greater  than  was  anticipated.  In  fact, 
every  penny  added  to  the  income  tax  has  brought  in  a  proportional  in- 
crease in  revenue.  But  it  is  to  be  noted  that  during  this  period  of  high 
taxation  the  increase  in  the  wealth  of  the  world  has  been  very  great, 
general  prices  have  risen  perhaps  25  per  cent,  and  the  rate  of  interest 
has  been  for  a  part  of  the  time  very  high.  Measured  in  money,  the  in- 
come of  the  country  may  have  increased  more  rapidly  than  the  tax: 
and  as  the  tax  is  paid  in  money,  it  is  a  smaller  part  of  the  true  wealth  of 
the  country  than  it  appears  to  be.  Recent  prices  of  consols  have  been 
such  as  to  give  a  greater  net  return  than  when  the  tax  was  lower. 

18 


274  THE  METHODS  OF  TAXATION 

taxes,  it  seems  not  unreasonable  to  conclude  that  justice 
cannot  be  attained  through  measures  depending  for  their 
equal  application  on  the  ascertainment  of  the  property  or 
income  of  the  individual  taxpayer.  Such  knowledge  is  in 
his  possession  alone,  and  not  always  even  in  his;  and  to 
found  a  system  of  taxation  on  the  supposition  that  he  will, 
or  can  be  made  to,  disclose  it,  demoralizes  society  by  mak- 
ing fraud  and  corruption  pecuniarily  advantageous.  It 
makes  dishonesty  the  best  policy.  We  may,  therefore, 
proceed  to  inquire  whether  the  requirements  of  justice 
will  not  be  better  complied  with  by  what  we  have  denomi- 
nated the  economic  method. 


CHAPTER   IX 

THE  ECONOMIC  METHOD 

THE  proportionate  method,  as  above  set  forth,  aims  to 
adjust  the  burden  of  taxation  according  to  the  possessions 
of  the  individual,  and  in  practice  this  implies  that  the 
amount  of  the  possessions,  or  revenue,  of  every  individual 
must  be  known ;  an  impossible  condition.  The  progressive 
method  escapes  this  difficulty  by  dividing  all  men  into  two 
classes,  the  rich  and  the  poor,  and  placing  the  burden  on 
the  rich.  But  to  classify  is  to  ignore  differences  in  the 
condition  of  the  individual  members  of  the  class,  and  since 
submission  to  burdens  means  suffering  or  sacrifice  by  in- 
dividual sentient  beings,  to  ignore  the  differences  in  their 
condition  is  evidently  unjust.  Moreover  in  practice  the 
progressive  method  to  some  extent  resorts  to  self-assess- 
ment, a  process  that  inevitably  leads  to  injustice  of  an 
especially  pernicious  sort.  Some  of  the  measures  of  the 
progressive  method,  it  is  true,  are  free  from  this  objec- 
tion; and  by  judicious  graduation  individual  sacrifices 
may  be  made  tolerably  equal.  But  these  measures  do 
not  produce  sufficient  revenue,  and  they  are  supplemented 
by  taxes  that  may  not  only  be  unjust,  but  may  even  neu- 
tralize the  effect  of  the  progressive  taxes.  The  great  aim 
of  the  progressive  method  is  not  so  much  to  diminish  the 
wealth  of  the  rich  as  to  increase  that  of  the  poor;  to  give 
the  poor  more  opportunity  to  become  rich.  Progressive 
taxes,  it  is  maintained,  will  do  this.  But  this  is  not  es- 
tablished by  experience,  for  the  limits  of  the  diffusion 


276  THE  METHODS  OF  TAXATION 

of  taxes  are  not  known;  and,  moreover,  it  is  conceivable 
that  the  same  end  may  be  attained  with  other  means.  As 
was  explained  at  the  outset,  the  economic  method  may  in 
practice  bring  about  the  results  aimed  at  by  the  other  two. 
The  predominant  aim  of  the  economic  method  is  to 
procure  the  revenue  of  the  government  with  the  least 
possible  diminution  of  the  revenue  of  its  subjects.  But 
this  does  not  mean  that  the  recognized  principles  of  jus- 
tice are  to  be  disregarded;  on  the  contrary,  it  is  itself  a 
principle  of  justice.  Taxes  are  by  nature  burdensome, 
and  nobody  will  deny  that  it  is  unjust  to  make  the  burden 
heavier  than  needs  be.  Nor  are  the  other  principles  of 
justice  that  we  have  found  to  be  implicitly  or  explicitly 
accepted  by  men  in  general  less  controlling.  Nothing  can 
excuse  the  legislature  for  resorting  to  the  morally  dis- 
astrous practice  of  demanding  disclosure  by  the  taxpayer, 
or  for  employing  spies  and  informers.  No  measure,  how- 
ever productive  of  revenue,  conforms  to  the  economic 
method,  if  it  disappoints  the  expectations  which  the  gov- 
ernment has  caused  its  subjects  to  form  with  reference 
to  the  future  conditions  of  industry  and  tenure  of  prop- 
erty. Nor,  whether  the  progressive  method  holds  up  the 
true  ideal  of  justice  or  not,  can  any  measure  be  tolerated 
that  clearly  diminishes  such  opportunity  to  obtain  wealth 
as  is  now  open  to  the  poor.  It  is  perhaps  not  easily  con- 
ceivable that  such  a  measure  should  be  even  in  theory 
economically  advantageous;  but  were  it  so,  a  prevalent 
feeling  that  it  was  unjust  would  make  it  impracticable. 
This  indeed  illustrates  a  general  principle.  The  loss  from 
friction  in  applying  any  measure  of  taxation  condemned 
by  public  opinion  as  unjust  is  apt  to  make  it  relatively 
unproductive  of  revenue. 


THE  ECONOMIC  METHOD  277 

The  fact  that  a  particular  tax  violates  no  rule  of  justice 
and  is  economically  collected  does  not  by  itself  prove  that 
such  a  tax  should  be  adopted.  For  we  have  to  consider 
taxation  as  a  whole,  and  particular  taxes  as  parts  of  that 
whole.  Hence  the  relations  of  taxes  must  be  examined; 
one  tax  may,  as  it  were,  neutralize  the  effect  of  another, 
or  enlarge  and  intensify  those  effects.  We  cannot,  in 
a  federal  state  like  our  own,  expect  to  attain  justice  when 
no  harmony  exists  between  the  system  of  taxation  em- 
ployed by  the  general  government,  and  that  of  the  states, 
especially  when  the  systems  of  the  states  differ  among 
themselves.  One  state  might  develop  a  system  admirable 
in  its  design,  and  that  might  be  satisfactory  in  its  results 
were  the  state  isolated,  but  which,  owing  to  the  different 
policy  of  its  neighbors,  might  ruin  some  of  its  own  indus- 
tries or  drive  them  from  it's  borders.  What  is  known  as 
the  protective  system  of  customs  duties  operates  in  favor 
of  certain  manufacturers  on  a  very  large  scale,  and  the 
states  where  those  manufacturers  carry  on  their  trades 
may  so  adapt  their  taxes  as  to  add  to  these  favors.  An 
attempt  by  an  adjoining  state  to  diminish  these  favors 
by  its  system  of  taxes  could  hardly  fail  to  expel  these  trades, 
and  concentrate  them  to  an  even  greater  degree.  It  seems, 
therefore,  that  the  economic  method  can  be  put  in  practice 
only  on  the  condition  that  substantial  harmony  prevails 
among  the  systems  of  the  states  and  that  of  the  general 
government ;  or  at  least  that  lack  of  harmony  may  seriously 
impair  the  results  that  it  is  proposed  to  attain. 

Subject  to  this  condition,  and  to  the  rules  of  justice,  the 
economic  method  seems  to  prescribe  the  employment  of 
only  such  taxes  as  shall  interfere  with  industry  to  the 
least  possible  extent,  and  —  which  is  much  the  same  thing 


278  THE  METHODS  OF  TAXATION 

—  be  collected  with  the  least  possible  expense;  vexation, 
as  Adam  Smith  says,  being,  if  not  strictly  speaking  ex- 
pense, certainly  equivalent  to  the  expense  at  which  every 
man  would  be  willing  to  redeem  himself  from  it.  "  The 
distinguishing  feature  of  the  best  tax,"  said  J.  R.  Mac- 
Culloch,  "  is  not  that  it  is  most  nearly  proportioned  to 
the  means  of  individuals,  but  that  it  is  most  easily  as- 
sessed and  collected,  and  is,  at  the  same  time,  most  con- 
ducive to  the  public  interests."  Nobody  pretends  that  it 
is  possible  to  apportion  equitably  the  benefits  of  govern- 
ment, and  it  seems  equally  hopeless  to  distribute  its  bur- 
dens with  any  approximation  to  justice.  Nothing  can 
be  more  certain,  however,  than  that  justice  is  not  offended 
by  doing  away  with  useless  expense  and  vexation,  and  the 
extent  to  which  this  can  be  done  may  perhaps  appear 
to  be  so  great  as  to  make  it  highly  inequitable  not  to  do 
it.  What  Adam  Smith  said  on  this  subject  is  too  well 
known  to  be  quoted,  and  later  writers  have  done  little 
more  than  repeat  his  statements.  Some  recent  observa- 
tions by  Prof.  A.  Marshall,  on  the  futility  of  legislative 
attempts  to  equalize  the  sacrifices  of  individual  taxpayers, 
are,  however,  so  judicious  as  to  deserve  mention.  They 
are  as  follows: 

"  No  near  approach  to  equity  in  taxation  is  attainable.  .  .  . 
Even  in  the  interests  of  equity,  canons  based  on  mere  con- 
siderations of  equity  are  often  of  but  secondary  importance 
in  practice.  Speaking  generally,  those  systems  of  finance 
have  caused  the  least  injustice  and  hardship  which  have  most 
favored  the  development  of  the  energies  and  inventiveness  of 
the  people;  which  have  hindered  them  the  least  in  the  selec- 
tion of  those  routes  for  the  satisfaction  of  their  wants ;  which, 
partly  in  pursuance  of  this  end,  have  given  a  preference  to 
taxes  which  were  productive  and  elastic  in  proportion  to  the 
army  of  officials  needed  to  levy  them;  which  have  avoided 


THE  ECONOMIC  METHOD  279 

vexatious  meddling,  and  which  have  been  most  definite  and 
certain,  and  free  from  surprises  and  from  opportunities  of 
corruption/' 

The  field  of  inquiry  is  thus  considerably  narrowed; 
and  much  of  it  has  been  already  traversed.  The  objec- 
tions to  the  general  property  tax  may  be  regarded  as  con- 
clusive, and  it  will  be  dismissed  from  consideration.  The 
income  tax  proper  —  for  much  of  the  taxation  under  this 
head  is  miscalled  —  as  it  must  be  assessed  by  those  who 
pay  it,  is  to  be  rejected,  although  something  remains  to 
be  said  of  the  practice  of  "  taxing  income  at  its  source." 
The  death  taxes,  as  they  are  usually  assessed  by  those  who 
do  not  pay  them,  or  under  conditions  that  make  under- 
assessment difficult,  are  comparatively  free  from  injus- 
tice of  the  worst  kind,  and  may  deserve  a  place  in  an 
economic  system  of  taxation.  They  have  been  discussed 
at  length  and  there  is  little  more  to  be  said  of  them  at 
present.  They  are  in  this  country  an  experiment,  and 
we  cannot  yet  determine  their  effects.  ~N"or,  as  the  very 
high  rates  in  other  countries  are  comparatively  recent, 
can  we  reason  from  their  analogy.  Taxes  on  expense,  on 
transfers  of  title  to  goods,  stamp  taxes,  licenses,  taxes  on 
occupations  and  on  corporations,  all  require  to  be  exam- 
ined with  reference  to  the  cost  of  collection  and  the  ob- 
struction of  industry,  as  well  as  to  the  principles  of  the 
diffusion  of  taxation.  Particular  attention  must  be  given 
to  the  taxation  of  land  and  other  monopolies;  and  since 
the  amount  and  value  of  property  to  be  taxed  are  not 
properly  fixed  by  the  owners,  the  office  of  assessor  and 
the  function  of  assessment  acquire  an  importance  much 
greater  than  has  hitherto  been  assigned  to  them,  and  de- 
mand exceptional  consideration. 


280  THE  METHODS  OF  TAXATION 

As  a  general  rule,  a  tax  that  produces  little  revenue, 
even  if  otherwise  satisfactory,  is  not  expedient.  The  ex- 
pense of  collecting  a  tax  seldom  increases  at  the  same  rate 
as  the  amount  collected.  A  certain  number  of  officers  will 
in  any  case  be  required,  and  a  certain  number  of  offices 
must  be  kept  open.  The  amount  collected  at  these  offices 
may  not  be  enough  to  pay  for  their  rent,  yet  it  might 
cause  those  who  pay  their  taxes  there  much  inconvenience 
were  they  compelled  to  go  to  more  distant  places.  Nor  is 
it  easy  for  the  government  to  close  an  office  once  estab- 
lished, or  to  discharge  superfluous  employees.  There  are 
not  a  few  custom-houses  in  this  country  where  the  duties 
collected  do  not  pay  the  cost  of  collecting  them;  but,  al- 
though these  conditions  are  of  long  standing,  the  attempts 
that  have  been  from  time  to  time  made  to  abolish  these 
offices  have  proved  unsuccessful.  Even  when  very  few 
persons  are  liable  to  pay  a  tax,  it  may  cost  as  much  to 
collect  it  as  when  there  are  a  great  many,  for  in  order  to 
be  sure  that  the  tax  is  paid  by  the  few  who  owe  it,  it 
may  be  necessary  to  examine  a  great  many  who  do  not. 
Much  the  same  is  true  of  a  tax  on  a  commodity  that  is 
little  used.  Special  machinery  may  have  to  be  contrived 
for  its  collection,  and  a  vast  amount  of  inspection  may  be 
necessary  to  prevent  a  small  amount  of  evasion. 

Taxes  of  this  kind,  as  well  as  others,  are  usually  levied 
by  means  of  licenses,  or  of  stamps  affixed  to  merchandise 
or  to  documents.  The  number  of  license  taxes  in  this 
country  is  not  very  great,  and  many  of  them  may  be 
regarded  rather  as  measures  of  police  than  of  taxation. 
There  may  be  sufficient  reasons  why  the  exercise  of  cer- 
tain professions  or  occupations  should  be  subject  to  regu- 
lation. Some  governmental  certificate  of  competency  or 


THE  ECONOMIC  METHOD  281 

character  may  be  thought  necessary  to  protect  the  public 
against  imposition;  and,  if  licenses  have  that  effect,  they 
may  be  justified,  and  a  fee  sufficient  to  pay  the  expense 
of  examination  and  registration  may  be  proper  enough. 
Fees  of  greater  amount  are  obviously  taxes,  and  as  ex- 
plained above,  by  increasing  the  cost  of  services  they  tend 
to  fall  on  the  whole  society.  The  English  government 
imposes  many  licenses  of  this  kind,  some  of  which  are 
graduated  and  some  are  not.  When  not  graduated,  such 
taxes  are  obviously  unequal.  They  are  a  heavier  burden 
on  the  practitioner  or  the  dealer  in  a  small  way,  than  on 
those  whose  income  is  larger,  and  their  effect  must  be 
to  diminish  that  opportunity  to  prosper  which  men  of 
small  resources  seem  justly  to  demand.  Perhaps  the  only 
licenses  in  this  country  that  deserve  consideration  as  taxes 
are  those  issued  to  dealers  in  alcoholic  drinks  and  tobacco. 
In  England  such  taxes  are  graduated  with  a  good  deal  of 
care,  either  according  to  the  rent  of  the  premises  where 
these  drinks  are  sold ;  or,  in  the  case  of  tobacco,  according 
to  the  quantity  dealt  in.  In  this  country,  although  the 
rates  vary  greatly  in  different  places,  there  is  for  the  most 
part  little  attempt  at  graduation.  In  general  it  seems  to 
be  thought  just  to  drive  small  dealers  out  of  the  trade, 
and  to  confine  it  to  those  who  have  large  capitals.  But  the 
sudden  imposition  of  high  rates  has  in  not  a  few  cases 
ruined  the  proprietors  of  small  but  decent  eating-houses, 
whose  guests  have  abandoned  them  because  they  were 
unable  to  bear  the  expense  of  furnishing  customary  bev- 
erages; a  result  difficult  to  reconcile  with  any  known 
principle  of  justice. 

If  it  be  thought  just,  as  it  appears  to  be  by  a  great  many 
people,  to  prevent  men  of  little  wealth  from  engaging  in 


282  THE  METHODS  OF  TAXATION 

the  liquor  traffic,  it  may  still  seem  reasonable  that  the 
license  taxes  paid  by  those  who  do  engage  in  the  traffic 
should  be  graduated,  even  if  only  by  the  rude  standard 
of  the  rent  of  the  premises  occupied.  It  cannot  be  denied 
that  in  England,  especially  when  compensation  is  granted 
for  the  refusal  of  the  government  to  renew  a  license,  very 
great  difficulties  are  encountered  in  estimating  this  rent, 
the  premises  (called  "  Tied  "  houses),  being  often  owned 
by  brewers  who  supply  the  liquor  sold,  and  who  can  mingle 
the  elements  of  price  and  rent  inextricably.  Some  ap- 
proximation to  the  truth  is  after  a  fashion  attained,  and 
perhaps  no  more  accurate  measure  of  the  profits  of  a 
dealer  can  be  employed  than  the  rent  that  he  pays.  To 
carry  on  a  larger  traffic  he  must  have  more  space  and 
a  better  situation,  and  the  landlord  may  on  the  whole  be 
trusted  to  see  that  when  very  great  profits  can  be  made 
by  the  use  of  his  property,  very  high  rent  shall  be  paid 
for  it.  A  license  tax  of  this  kind,  therefore,  might  be 
only  in  part  paid  by  the  consumer,  but  would  fall  also  on 
rent,  and  on  rent  which  it  may  be  thought  peculiarly  just 
to  tax  at  an  exceptional  rate.  In  what  are  called  the  resi- 
dential parts  of  a  town,  the  proximity  of  a  place  where 
drink  is  sold  frequently  depreciates  house  rent,  and  it 
seems  reasonable  that  those  who  obtain  high  rents  by 
means  of  a  traffic  that  impairs  the  rents  of  their  neigh- 
bors should  pay  correspondingly  higher  taxes.  It  does 
not  necessarily  follow,  however,  that  this  tax  should  be 
levied  by  means  of  a  license  fee;  it  could  obviously  be 
paid  as  a  tax  on  rent,  or  on  land,  as  in  the  case  of  other 
premises  having  a  high  rental  value. 

So   far  as   these  license   taxes   are   required   of  retail 
dealers,  they  do  not  seem  to  increase  the  cost  of  what  is 


THE  ECONOMIC  METHOD  283 

sold  by  much  more  than  the  amount  of  the  tax.  This  is 
because  the  tax,  to  the  extent  that  it  is  collected  from  the 
consumer,  is  collected  with  little  delay,  the  commodity 
taxed  passing  at  once  into  consumption.  When  the  license 
is  required  of  wholesale  dealers  and  of  producers  this  is 
no  longer  true,  and  there  seems  no  reason  either  on  fiscal 
grounds  or  as  a  police  regulation  why  such  taxes  should 
be  repeated  a  number  of  times.  When  the  tax  on  retail 
dealers  is  made  very  high,  the  expense  of  collection  be- 
comes much  greater.  The  temptation  to  illicit  sale  be- 
comes very  strong,  and  a  large  force  of  inspectors  must 
be  maintained  not  only  to  secure  revenue  but  also  to  pro- 
tect legitimate  dealers  against  ruinous  competition.  The 
expense  is  of  course  still  further  increased  when  there  is 
also  a  heavy  tax  on  production,  a  point  which  has  already 
been  illustrated  in  considering  taxes  on  luxuries.  These 
remarks  apply  in  the  main  to  taxes  on  tobacco  as  well 
as  on  alcoholic  drinks.  They  are  all  objectionable  on  the 
principles  of  the  economic  method ;  but  they  are  supported 
by  a  public  opinion  that  cannot  be  disregarded.  When 
the  traffic  in  liquor  is  in  question,  the  principles  of  justice 
ordinarily  accepted  by  men  cease  to  be  binding,  and  no- 
body who  engages  in  this  traffic  needs  expect  that  his  pro- 
tests against  unjust  legislation  will  receive  much  attention. 
Whether  it  is  on  the  whole  for  the  welfare  of  the  society 
that  this  traffic  should  be  forced  into  the  hands  of  men 
who  are  treated  as  social  outcasts,  if  not  as  outlaws,  seems 
to  be  a  question  that  arouses  little  public  interest. 

What  are  known  as  stamp  taxes,  with  which  most  other 
countries  are  cursed,  are  fortunately  not  here  prevalent. 
The  name  is  misleading,  or  at  least  not  descriptive,  for 
it  tells  nothing  of  the  nature  of  the  tax,  but  merely  refers 


284  THE  METHODS  OF  TAXATION 

to  a  particular  evidence  of  payment.  In  a  few  cases,  the 
stamp  indicates  the  payment  of  a  tax  by  the  producer. 
The  beer  tax,  for  example,  is  paid  in  the  purchase  of 
stamps,  one  of  which  is  affixed  to  every  barrel  of  beer  by 
the  brewer,  in  such  a  manner  that  the  beer  cannot  be 
drawn  without  cancelling  the  stamp.  This  tax,  whatever 
may  be  thought  of  it  as  a  sumptuary  impost,  is  on  the 
whole  very  economically  collected.  Owing  to  the  bulky 
character  of  the  commodity  it  is  not  easy  to  produce  it 
illicitly,  and  owing  to  the  fact  that  it  enters  into  con- 
sumption almost  immediately  after  the  payment  of  the 
tax,  the  enhanced  cost  to  the  consumer  is  very  slight.  The 
tax,  too,  is  very  moderate,  and  is  perhaps  fiscally  the 
most  productive  and  advantageous  of  all  sumptuary  taxes. 
Breweries  are  not  very  numerous,  and  a  small  force  of 
inspectors  can  supervise  them.  Beer,  unlike  spirits,  is 
produced  solely  to  be  drunk,  and  a  tax  upon  its  produc- 
tion seems  hardly  burdensome  to  any  other  industry.  The 
national  government  still  levies  an  absurd  and  unpro- 
ductive tax  on  playing-cards,  but  with  that  exception,  and 
that  of  the  stamps  on  packages  of  tobacco,  oleomargarine, 
etc.,  it  has  no  other  stamp  taxes  of  importance.  The  State 
of  New  York  is  perhaps  the  only  one  that  has  adopted  the 
pernicious  policy  of  taxing  sales,  or  transfers  of  property, 
by  means  of  stamps,  as  will  be  presently  explained. 

The  fallacy  that  is  likely  to  arise  from  making  such 
a  class  as  that  of  stamp  taxes,  is  due  to  the  fact  that  some 
things  are  of  a  relatively  permanent  and  indestructible 
nature,  while  others  are  immediately  consumed  and  en- 
tirely disappear.  A  tax  on  beer  and  a  tax  on  the  transfer 
of  title  to  real  estate  may  both  be  collected  by  means 
of  stamps,  but  they  are  very  different  in  their  effects. 


THE  ECONOMIC  METHOD  285 

The  tax  on  beer  may  be  regarded  as  a  tax  on  the  sale  of 
beer;  but  it  is  collected  only  once.  The  tax  on  the  sale 
of  real  estate  is  collected  whenever  a  sale  takes  place. 
It  may  be  collected  several  times  in  a  single  year,  and 
several  dozen  times  in  the  course  of  a  number  of  years. 
Real  estate,  however,  is  something  that  is  transferred  com- 
paratively seldom,  while  the  title  to  a  share  of  stock  in 
a  corporation  is  now-a-days  transferred  perhaps  several 
times  in  a  single  day.  It  seems  best,  therefore,  to  ignore 
the  accident  of  affixing  a  stamp,  and  to  confine  the  atten- 
tion to  the  essential  element  of  the  burden  of  the  tax. 
With  the  exceptions  noted  above,  we  may  safely  treat 
stamp  taxes  as  taxes  on  sales,  or  transfers  of  title.  Some 
of  them  might  be  classified  as  taxes  on  acts ;  such  are  the 
English  taxes  on  agreements,  on  many  legal  formalities, 
and  on  receipts  for  the  payment  of  sums  over  ten  pounds. 
These  acts,  however,  almost  always  relate  to  the  transfer 
of  property.  In  the  case  of  receipts  it  is  to  be  presumed 
that  some  thing  or  some  service  has  been  paid  for ;  and  in 
the  other  cases  property  is  usually  involved,  the  value  of 
which  must  be  reduced  by  whatever  increases  the  expense 
of  transferring  it.  Such  taxes  are  all  hindrances  to  that 
freedom  of  barter  or  exchange  which  is  the  vital  principle 
of  our  modern  industrial  system.  It  is  to  be  added  that 
by  far  the  largest  part  of  the  revenue  from  the  English 
stamp  taxes  comes  from  conveyances  and  mortgages  of 
real  property  and  from  sales  of  shares  of  stock.  Nobody 
can  doubt  that  such  taxes,  even  when  graduated  accord- 
ing to  the  value  of  the  property,  are  altogether  arbitrary 
and  unequal,  owing  to  the  uncertain  number  of  the  sales 
of  any  particular  piece  of  property,  and  they  evidently 
lessen  the  value  of  the  property  affected. 


286  THE  METHODS  OF  TAXATION 

Bearing  in  mind  the  foregoing  cautions,  we  may  safely 
treat  the  great  body  of  taxation  as  consisting  (1)  of  taxes 
levied  according  to  the  capitalized  or  rental  value  of  tan- 
gible property;  and  (2)  of  taxes  levied  either  on  the  phys- 
ical transfers  of  such  property  or  on  the  transfers  of  title  to 
it.  The  second  class  of  taxes,  as  has  been  already  sug- 
gested, tends  to  affect  the  value  of  what  is  subjected  to 
taxation  of  the  first  class.  Taxes  on  the  physical  transfer 
of  things  —  and  we  may  with  some  important  qualifica- 
tions include  persons  —  are  levied  chiefly  on  railroad  or 
water  transportation,  and  on  imported  goods.  We  might, 
it  is  true,  regard  imported  goods  as  sold  by  a  foreign 
producer  or  merchant  to  a  resident  of  this  country,  and 
customs  duties  could  then  be  treated  as  taxes  on  sales.  It 
would  make  little  difference  if  this  classification  were 
adopted;  but  it  may  often  be  the  case  that  the  goods  are 
produced  or  bought  by  a  resident  of  this  country,  and  are 
not  sold  by  him  until  after  he  has  paid  the  duty  on  them. 
For  this  reason,  and  because  the  physical  act  of  importa- 
tion is  visible  and  notorious,  it  seems  proper  to  make  a 
class  of  the  taxes  specifically  declared  by  statute  to  be 
due  when  that  act  takes  place.  The  foreign  origin  of  the 
goods  may  be  in  the  view  of  the  scientific  economist  noth- 
ing but  an  accident;  but  it  is  an  accident  so  conspicuous 
and  so  familiar  to  every  one  that  it  might  cause  confusion 
to  ignore  it.  In  principle,  however,  a  tax  on  imported 
goods  does  not  differ  from  a  tax  on  the  production  of 
spirits  or  beer.  The  essential  fact  is  that  both  must  be 
paid  before  the  commodity  can  enter  into  trade  or 
consumption. 

Owing  to  the  prevalence  of  some  grave  misunderstand- 
ings, it  seems  desirable  to  consider  separately  taxes  on 


THE  ECONOMIC  METHOD  287 

incorporations,  and  on  what  are  commonly  called  monopo- 
lies. A  corporation,  from  the  industrial  point  of  view, 
is  nothing  but  a  number  of  persons  who  contribute  some 
of  their  wealth  for  the  prosecution  of  an  enterprise  which 
is  managed  by  trustees  or  agents  chosen  for  that  purpose. 
Apart  from  statutory  restrictions,  there  is  no  reason  why 
the  enterprises  carried  on  by  means  of  corporations  should 
not  be  carried  on  by  means  of  firms  or  by  individuals, 
except  their  occasional  magnitude.  Some  of  these  enter- 
prises are  perhaps  necessarily  on  such  a  colossal  scale  that 
no  individual  could  command  the  capital  required.  Nor 
could  any  firm  or  partnership  carry  them  on,  because  the 
common  law  makes  every  member  of  a  partnership  liable 
for  its  debts  to  the  extent  of  his  whole  private  estate,  and 
prudent  men  will  incur  this  risk  only  when  they  know  the 
responsibility  of  those  with  whom  they  are  associated  —  a 
condition  which  cannot  be  complied  with  when  their  num- 
ber is  large.  It  has  therefore  been  the  policy  of  the  legis- 
lature in  modern  times  to  limit  the  liability  of  those  who 
incorporate  an  enterprise  to  the  amount  of  the  capital, 
usually,  which  they  contribute. 

The  economic  gain  from  this  limitation  has  been  beyond 
question  enormous.  A  vast  amount  of  wealth  which  could 
not  be  productively  employed  with  safety  by  those  who 
have  saved  it,  is  rendered  available  to  industry.  Enter- 
prises which  could  not  otherwise  have  been  undertaken 
at  all  become  practicable ;  enterprises  which  could  be  car- 
ried on  to  little  advantage  on  a  small  scale  become  profit- 
able. By  this  means  a  very  great  number  of  people  who 
were  formerly  obliged  to  employ  their  capital  in  a  single 
form  of  industry  under  their  own  supervision,  or  who  had 
great  difficulty  in  safely  employing  it  at  all,  are  enabled 


288  THE  METHODS  OF  TAXATION 

to  participate  in  the  profits  of  nearly  all  the  industries 
of  the  country.  They  are  also  enabled  by  the  exercise  of 
their  own  judgment,  or  that  of  competent  advisers,  to 
distribute  their  investments  in  so  many  ways  that  the 
failure  of  one  enterprise  will  be  balanced  by  the  success 
of  the  others.  In  spite  of  the  very  great  losses  that  have 
been  incurred  through  the  mismanagement  of  corporations, 
the  evidence  appears  to  be  conclusive  that,  before  this  form 
of  investment  was  available,  the  losses  not  only  from  ina- 
bility to  invest  but  also  from  the  mismanagement  of  such 
enterprises  as  were  open  to  investors,  were  relatively  much 
greater.  Nor  do  the  figures  of  modern  trade  show  that 
the  losses  of  creditors  are  any  greater  from  the  failure  of 
companies  of  limited  liability  than  from  the  failure  of 
firms  or  individuals;  it  would  perhaps  not  be  very  diffi- 
cult to  prove  that  quite  the  contrary  is  true. 

From  these  premises  two  important  conclusions  follow. 
In  the  first  place  it  is  obvious  that  when  an  enterprise  can 
be  made  profitable  only  by  the  use  of  a  vast  capital,  its 
existence  cannot  be  said  to  limit  the  opportunity  of  a  man 
of  little  capital  to  engage  in  it.  He  could  not  do  it,  no 
matter  whether  his  competitor  were  a  corporation  or  an  in- 
dividual. ~No  man  having  little  capital  could  build  and 
manage  an  ocean  steamship ;  and  if  corporations  were  not 
tolerated,  it  is  doubtful  if  they  could  be  built  to  any  great 
extent,  if  at  all.  It  is  of  course  true  that  if  there  were  no 
enterprises  on  a  large  scale,  there  would  be,  in  a  sense, 
more  opportunity  for  small  capitals.  If  there  were  no 
large  vessels,  there  might  be  more  small  ones;  just  as  if 
there  were  no  mowing  machines  or  harvesters  there  would 
be  more  scythes  and  sickles.  Experience,  however,  does 
not  support  this  view.  Every  great  enterprise  begets  a 


THE  ECONOMIC  METHOD  289 

number  of  little  ones.  It  creates  a  demand  for  new  things 
and  enlarges  the  demand  for  old  ones.1  If  justice  consists 
in  increasing  opportunities  for  the  employment  of  small 
capitals,  it  will  not  be  furthered  by  diminishing  the  op- 
portunities for  the  employment  of  large  ones.  To  lay  ex- 
ceptionally heavy  taxes  on  such  employment  may  therefore 
tend  to  hinder  rather  than  to  promote  the  attainment  of 
justice;  and  even  if  large  concerns  prevent  the  growth  of 
small  ones,  it  would  still  be  true  that  they  afford,  by  the 
division  of  their  stock  into  shares,  an  almost  limitless 
increase  in  the  opportunities  of  the  small  investor. 

The  second  conclusion  is  that  when  an  enterprise  can 
be  carried  on  by  a  corporation  with  a  small  capital,  no 
diminution  of  the  opportunities  for  individuals  results. 
Any  individual  can  incorporate  his  business  if  he  chooses. 
By  doing  so  he  can  perhaps  obtain  more  capital  and  operate 
with  less  risk;  but  so  can  his  competitor.  He  can  obtain 
more  capital,  however,  only  by  sharing  the  profits  of  the 
business  with  those  who  furnish  the  capital,  which  is  the 
same  thing  as  offering  them  an  opportunity  for  investment. 
There  is  no  economic  reason  why  a  corporation  should  have 
better  credit  than  a  firm  or  an  individual  of  equal  re- 
sources ;  indeed,  because  of  its  limited  liability,  it  should 
have  less  credit.  No  doubt  many  of  the  managers  of  cor- 
porations have  been  dishonest;  they  have  cheated  their 
shareholders  and  their  creditors.  It  is  equally  true  that 
many  partners  in  firms,  and  many  individual  traders  have 
been  dishonest ;  the  records  of  the  bankruptcy  courts  afford 
ample  evidence.  Dishonesty  in  the  management  of  cor- 

1  On  this  point  some  figures  presented  by  the  late  Edward  Atkinson 
are  instructive.  The  number  of  small  industries  existing  in  the  City  of 
Boston  he  found  to  be  surprisingly  large,  and  to  show  a  marked  ten- 
dency to  increase. 

19 


290  THE  METHODS  OF  TAXATION 

porations  may  be  on  a  larger  scale,  because  their  operations 
are  on  a  larger  scale ;  but  it  is  on  the  whole  more  difficult 
and  more  liable  to  exposure.  And,  as  there  is  an  economic 
gain  in  the  increased  opportunity  for  investors  afforded  by 
incorporated  enterprises,  so  there  is  a  diminution  of  loss, 
owing  to  the  wider  diffusion  of  the  effects  of  failure. 

'No  principle  of  justice,  therefore,  seems  to  forbid  carry- 
ing on  business,  on  either  a  large  or  a  small  scale,  under  the 
corporate  form;  on  the  contrary,  justice  seems  to  demand 
that  it  should  not  only  be  permitted  but  even  encouraged. 
Hence  the  practice  of  laying  heavier  taxes  on  capital  em- 
ployed in  this  form  than  on  that  employed  by  individuals 
may  seem  unjust.  It  is  like  laying  a  tax  on  any  improved 
method  of  production  or  exchange;  it  increases  the  price 
at  which  the  society  would  obtain  better  service  or  cheaper 
goods.  There  may  be  economic  reasons  why  such  taxation 
should  sometimes  be  adopted;  and  many  of  the  taxes  on 
corporations  are  of  such  a  nature  as  to  be  collected  with 
little  expense  and  with  much  certainty.  It  may  be  very 
proper  to  collect  a  fee  for  issuing  a  license  to  a  corporation, 
and  perhaps  a  fee  for  registering  its  certificates  of  stock; 
but  when  these  fees  are  made  to  produce  revenue  they  be- 
come taxes,  and  have  the  same  effect  as  taxes  on  individuals 
engaged  in  business.  They  are  similar  to  the  French 
patentes,  and  like  them  tend  to  result  in  increased  burdens 
on  the  consumer.  So  long  as  they  are  not  very  heavy  this 
result  may  be  imperceptible ;  but  in  that  event  they  may 
not  produce  revenue  enough  to  pay  the  officers  employed 
to  collect  them.  If  they  were  made  very  heavy  they  might 
not  produce  very  much  more,  for  the  economic  gain  from 
incorporation  might  be  neutralized.  But  owing  to  the 
exposure  of  scandalous  abuses  in  certain  concerns,  a  tor- 


THE  ECONOMIC  METHOD  291 

rent  of  denunciation  has  been  recently  directed  against 
corporations  in  general,  and  they  are  not  likely  to  be  soon 
relieved  of  discriminative  taxation,  even  though  it  fall 
eventually,  in  some  degree,  on  those  who  indulge  in  denun- 
ciation of  this  kind. 

As  a  condition  of  limiting  the  liability  of  shareholders 
to  pay  the  debts  of  their  company,  the  legislature  imposes 
many  restraints  which  do  not  apply  to  individuals.  The 
charter  may  be  issued  only  for  a  term  of  years,  and  it  is 
subject  to  alteration  or  repeal.  The  amount  of  the  profits 
distributed  as  dividends  may  be  limited,  and  burdens  of 
many  kinds  may  be  imposed,  including  special  rates  of  tax- 
ation. In  defense  of  these  restraints  it  may  be  said  that 
shareholders  do  not  exercise  proper  control  over  their 
agents;  the  managers  of  corporations  do  as  they  please, 
and  may  use  their  powers  to  oppress  weak  competitors. 
"No  manager  of  a  corporation,  however,  can  be  quite  so 
arbitrary  as  an  individual,  or  a  firm,  of  very  great  wealth. 
He  may  do  a  great  many  arrogant  and  oppressive  things; 
but  he  does  them  at  the  risk  of  being  made  chargeable  as 
a  trustee.  He  is  in  fact  usually  the  representative  of  a 
few  men  of  great  wealth,  who  can  prescribe  his  conduct 
and  displace  him  if  it  does  not  please  them.  These  men 
would  be  powerful  in  any  event,  and  the  restraints  that 
the  legislature  can  impose  on  corporations,  cannot  be  im- 
posed on  them,  except  by  general  laws  which  would  restrain 
the  activities  and  reduce  the  opportunities  of  poor  men 
much  more  than  those  of  the  rich.  It  is  undoubtedly  a 
very  dangerous  course  for  the  legislature  to  empower  cor- 
porations to  do  certain  acts  which  it  forbids  individuals 
to  do ;  the  disgraceful  history  of  many,  if  not  of  most,  of 
the  banks  chartered  by  the  states  before  the  Civil  War  shows 


292  THE  METHODS  OF  TAXATION 

this  plainly  enough.  When  the  legislature  adopts  this 
policy,  it  is  of  course  necessary  to  prescribe  the  terms  on 
which  these  special  powers  may  be  exercised.  It  does  not 
follow  even  then  that  corporations  exercising  these  powers 
should  be  taxed  at  an  exceptionally  high  rate.  When  an 
act  is  unjust,  whether  done  by  an  officer  of  a  corporation 
or  by  an  individual,  it  is  not  to  be  punished  or  prevented 
by  laying  taxes  on  the  business  in  which  that  corporation 
or  that  individual  is  engaged;  still  less  when  such  taxes 
must  be  laid  on  all  corporations  engaged  in  such  business, 
whether  their  officers  are  guilty  of  such  acts  or  not.  Such 
taxes  are  apt  to  fall  in  the  end  with  accumulated  weight 
not  only  on  shareholders,  who  may  be  ignorant  or  innocent, 
but  also  on  consumers,  who  are  both.  They  may  be  re- 
garded as  belonging  to  the  class  of  taxes  on  the  capitalized 
value  of  tangible  property,  even  when  they  are  called 
franchise  taxes. 

It  has  seemed  necessary  to  consider  this  subject  at  some 
length  and  with  some  repetition,  because  the  tendency  to 
personify  abstractions,  inveterate  in  mankind,  seems  to 
influence  much  of  the  discussion  and  even  of  the  legislation 
concerning  corporations.  They  are  constantly  spoken  of 
as  if  they  were  persons,  having  all  the  vices,  although 
perhaps  not  all  the  virtues,  of  sentient  beings.  They  are 
accused  of  ambition,  of  oppression,  of  corruption,  of  greed, 
of  dishonesty,  of  robbery.  Such  charges  evidently  cannot 
be  sustained  against  metaphysical  entities;  they  imply 
personality.  A  corporation,  however,  is  a  person  only  by 
a  figure  of  speech.  It  is  a  legal  term  signifying  that  a 
number  of  persons  may  agree  to  combine  for  the  purpose 
of  using  their  wealth  in  carrying  on  a  certain  business 
according  to  the  terms  of  a  charter  or  franchise  granted 


THE  ECONOMIC  METHOD  293 

by  the  legislature,  in  which  case  they  may  sue  and  be 
sued  collectively  under  their  corporate  name.  These  per- 
sons, the  shareholders  or  stockholders,  being  too  numerous 
to  transact  business,  must  employ  trustees  and  managers; 
they  are  pecuniarily  responsible  for  the  acts  of  such  agents, 
but  the  conditions  are  such  that  they  can  have  little  moral 
responsibility.  It  is  really  the  managers  who  are  respon- 
sible, whose  acts  have  moral  quality,  who  may  be  blame- 
worthy, who  may  be  guilty  of  all  the  iniquities  attributed 
to  corporations. 

It  seems  clear  that  if  any  law  is  broken  it  must  be  by 
these  persons,  and  that  they  are  the  persons  to  be  punished 
as  individual  malefactors  are  punished.  The  directors 
or  trustees  who  appoint  them  may  sometimes  instruct  them 
to  disregard  the  law,  and  may  thus  participate  in  their 
guilt,  and  deserve  to  share  their  punishment.  But  to 
"  punish  a  corporation,"  when  its  managers  have  been 
guilty  of  crime,  by  depriving  the  shareholders  of  some  of 
their  property,  is  certainly  a  very  primitive  way  of  admin- 
istering justice.  With  the  wonderfully  extensive  ramifica- 
tions of  our  modern  credit  system,  it  may  be,  by  depreciat- 
ing the  value  of  the  securities  of  the  corporation,  to  punish 
millions  of  depositors  in  savings  banks  and  holders  of  life- 
insurance  policies,  some  of  whom  may  never  even  have 
heard  of  its  existence,  and  none  of  whom  have  any  knowl- 
edge of  the  acts  of  its  managers.  It  seems  still  more  un- 
reasonable to  propose  to  "  curb  "  or  "  chastise  "  corpora- 
tions in  general,  because  the  managers  of  some  of  them  have 
violated  the  law.  The  zeal  with  which  such  violations  are 
frequently  denounced  seems  little  more  discriminating 
than  that  of  the  leader  of  the  Catholics  in  the  massacre  at 
Beziers,  with  his  cry:  "  Tuez  toujours;  Dieu  reconnaitra 


294  THE  METHODS  OF  TAXATION 

les  siens!  "  To  levy  taxes  on  corporations  under  the  influ- 
ence of  such  zeal  seems  not  likely  to  have  consequences 
either  morally  or  economically  desirable. 

~No  one  who  considers  the  outcries  against  monopolies 
can  fail  to  be  struck  with  the  confusion  of  thought  which 
these  outcries  imply.  Attention  has  already  been  called  to 
the  distinction  between  a  monopolist  and  a  monopoly ;  be- 
tween an  individual  exercising  a  certain  right  of  property, 
and  a  right  of  property  which  may  be  exercised  by  a  large 
number  of  persons,  as  in  the  case  of  shareholders  in  a  cor- 
poration. We  may  say  broadly  that  a  monopoly  exists 
whenever  a  right  of  property  is  of  such  a  nature  as  enables 
its  owner,  or  owners,  to  obtain  from  its  exercise  more  than 
what  is  called,  to  use  Adam  Smith's  language,  fair,  ordi- 
nary, reasonable  profit.  This  definition  may  not  seem  sci- 
entifically accurate,  for  the  exclusion  of  competition  which 
is  usually  associated  with  the  term  monopoly  may  not  en- 
able its  owner  to  obtain  more  than  ordinary  profit.  A 
substance  might  conceivably  be  found  only  in  a  single  mine, 
and  yet  the  price  at  which  it  could  be  sold  might  be  only 
enough  to  pay  the  cost  of  production.  So  a  railroad  might 
be  the  only  means  of  transportation  between  two  places, 
while  the  cost  of  operating  it  might  be  so  great  as  to  leave 
little  profit  for  its  owners;  and  there  are  in  fact  many 
such  cases.  Where  competition  would  not  take  place,  there 
can  be  no  injustice  in  its  exclusion.  It  is  evident,  there- 
fore, that  to  constitute  a  monopoly  in  the  ordinary  sense, 
there  must  be  such  a  right  of  property  as  actually  enables 
its  owner,  by  the  employment  of  a  certain  amount  of  cap- 
ital, to  obtain  more  than  the  usual  rate  of  profit  thereon. 

Now  there  are  monopolies  deliberately  and  intention- 
ally created  by  the  legislature.  Such  are  patent  rights, 


THE  ECONOMIC  METHOD  295 

which  are  a  species  of  property  of  very  long  standing,  and 
of  scarcely  questioned  justice.  The  legislature  explicitly 
grants  to  one  who  invents  a  new  process  the  right  to  make 
use  of  it,  to  the  exclusion  of  all  other  persons.  Many  of 
these  rights,  no  doubt,  prove  to  have  little  or  no  value,  and 
can  produce  no  profit.  But  it  is  reasonable  to  presume  that 
as  a  class  such  rights  have  a  value;  in  many  instances 
these  values  have  proved  to  be  almost  fabulous.  This  result 
is  obviously  contemplated  by  the  legislature;  it  is  too 
notorious  to  be  ignored.  The  policy  is  to  stimulate  in- 
ventors with  the  hope  of  exceptional  profits.  Were  they 
to  spend  years  of  thought  and  toil  in  developing  processes 
which  any  one  might  freely  use,  they  would  obtain  no 
reward  for  their  labors.  Their  monopoly  is  their  reward, 
and  to  impose  special  taxes  on  such  monopolies  is  plainly 
inconsistent  with  the  general  policy.  It  would  be  to  take 
away  with  one  hand  what  was  bestowed  with  the  other,  and 
would  destroy  the  whole  system  of  granting  patent  rights 
for  the  purpose  of  encouraging  invention.  So  long  as  the 
system  prevails,  the  monopolies  that  it  creates  must  be  free 
from  exceptional  taxation.  This  principle  is  the  founda- 
tion on  which  numbers  of  great  industries  have  been  built, 
and  to  repudiate  it  would  be  such  a  disappointment  of  rea- 
sonable expectations  as  justice  could  not  tolerate.  With 
due  notice  it  may  be  modified  and  even  abandoned  in  the 
future,  but  vested  rights  must  be  respected. 

Another  class  of  monopolies  created  by  the  legislature, 
although  not  with  such  explicit  declaration  of  purpose,  is 
that  promoted  by  the  policy  of  laying  on  imported  goods 
duties  from  which  similar  goods  produced  in  the  country 
are  exempt.  So  far  as  there  is  free  competition  in  the 
production  of  such  goods,  this  policy  may  not  create  monop- 


296  THE  METHODS  OF  TAXATION 

olies.  The  manufacture  of  cotton  cloth,  for  example, 
seems  to  be  a  business  in  which  any  one  with  sufficient 
capital  may  engage  with  as  much  opportunity  for  making 
a  profit  as  his  competitors.  When  the  duty  on  cotton  cloth 
was  first  imposed,  to  be  sure,  those  engaged  in  the  manu- 
facture may  have  for  a  time  made  exceptional  gains ;  but 
competition  would  tend  to  make  them  temporary.  But 
there  are  many  concerns  that,  as  we  say,  produce  their  own 
raw  materials;  they  have  two  sources  of  profit.  The 
great  companies  manufacturing  iron  and  steel  own  mines 
of  coal  and  iron  ore,  and  it  seems  clear  that  the  exclusion 
of  foreign  coal  and  iron  ore  tends,  by  limiting  competition, 
to  increase  the  price  of  the  domestic  products,  and  the  value 
of  the  mines  from  which  they  are  obtained.  This  result 
is  too  obvious  to  have  been  unforeseen  by  the  legislature; 
the  avowed  purpose  of  what  are  called  protective  duties  is 
to  increase  the  gains  of  domestic  producers,  and  it  would 
be  absurd  to  maintain  that  when  it  laid  a  tax  on  imported 
coal  the  legislature  did  not  intend  to  benefit  the  owners  of 
coal  mines  in  this  country.  So  far  as  such  owners  possess 
a  monopoly,  it  must  be  regarded  as  to  a  certain  extent 
created  deliberately  by  the  legislature,  and  it  would  be 
inconsistent  with  the  whole  theory  of  protective  duties  to 
lay  exceptional  taxes  on  things  to  which  these  duties  are 
meant  to  give  an  exceptional  value.  If  the  protective  policy 
is  just,  such  taxes,  being  inconsistent  with  that  policy, 
would  be  unjust. 

Still  another  class  of  monopolies  purposely  created  by 
the  legislature  is  that  of  companies  formed  for  building 
and  operating  railways,  and  for  the  supply  of  water,  light, 
etc.,  to  towns.  The  status  of  persons  owning  rights  of  prop- 
erty so  created  is  somewhat  peculiar ;  they  are  authorized, 


THE  ECONOMIC  METHOD  297 

on  paying  compensation,  to  take  the  property  of  other  per- 
sons for  the  uses  prescribed  by  the  legislature.  In  other 
words,  they  exercise  the  right  of  eminent  domain,  a  right 
usually  regarded  as  a  sovereign  prerogative.  For  the  sov- 
ereign to  delegate  this  right  was  a  proceeding  which,  at  the 
beginning  of  the  railroad  era,  aroused  a  good  deal  of  ques- 
tion; the  debates  which  took  place  in  the  courts  and  else- 
where may  still  be  read  with  interest.  The  economic  gain 
from  the  construction  of  railways  was,  however,  perceived 
to  be  so  great  as  to  make  it  imperative  to  secure  it,  and  the 
franchises  of  these  corporations  were  soon  established  on  a 
legal  basis.  So  urgent  was  the  demand  that  the  general 
government  presented  vast  tracts  of  land  to  such  persons 
as  would  risk  their  capital  in  these  comparatively  untried 
enterprises,  and  pledged  its  credit  as  security  for  their 
loans,  while  states,  counties,  and  towns  vied  with  one  an- 
other in  offering  like  inducements.  It  needs  no  argument 
to  prove  that  these  land  grants  and  other  bounties  were 
intended  to  bring  exceptional  profits  to  the  recipients ;  that 
was  their  avowed  purpose  and  their  obvious  result.  Mo- 
nopolistic gains  of  this  kind  may  be  classed  with  those  of 
the  grantees  of  patent  rights ;  both  are  held  out  as  induce- 
ments to  employ  money  and  labor  in  particular  ways,  and 
it  seems  as  unreasonable  in  one  case  as  in  the  other  to 
defeat  this  policy  by  exceptionally  heavy  taxation.  Many 
of  those  who  invested  their  money  in  railroads  lost  it  all, 
as  many  inventors  have  lost  their  time  and  trouble,  and  the 
exceptional  gains  of  some  investors  and  some  inventors 
must  be  regarded  as  meant  by  the  legislature  to  persuade 
men  to  take  the  risk  of  such  losses. 

For  the  legislature  to  attempt  to  deprive  men  of  the 
gains  thus  deliberately  promised  them  seems  unjust,  as 


298  THE  METHODS  OF  TAXATION 

being  a  disappointment  of  reasonable  expectations.  The 
doctrine  of  estoppel,  which  is  imbedded  in  the  national 
constitution  in  the  form  of  a  prohibition  of  laws  impairing 
the  obligation  of  contracts,  is  a  necessary  condition  of 
industrial  progress,  and  even  of  civilized  life.  To  keep 
promises  is  elementary  morality,  and  promises  made  by  an 
authorized  agent  are  as  binding  as  if  made  by  the  princi- 
pal. Rulers  chosen  by  the  people  are  the  people's  agents, 
and  so  long  as  they  act  within  their  authority,  the  people 
cannot  justly  repudiate  their  contracts.  Nor  can  they  in 
fact  successfully  repudiate  them  if  they  would,  for  the 
courts  must  enforce  the  constitution.  No  doubt,  in  many 
cases,  the  legislature  has  exceeded  its  authority;  it  has 
made  contracts  that  it  was  not  empowered  to  make.  Such 
contracts  may  be  justly  repudiated;  the  expectations  that 
men  form  concerning  their  results  may  not  be  reasonable. 
He  who  deals  with  an  agent,  whether  an  individual  or  a 
legislature,  must  assure  himself  of  the  agent's  powers,  if 
he  proposes  to  hold  the  principal.  The  courts  seem  to 
have  held  the  balance  fairly  even.  They  have  enforced 
valid  and  abrogated  invalid  contracts. 

The  foregoing  statements  need  to  be  qualified  in  some 
important  respects.  As  the  excitement  aroused  by  the 
advent  of  railroads  subsided,  cooled  frequently  by  the  fail- 
ure of  many  of  them  to  earn  the  interest  on  their  bonded 
debts,  the  charters  granted  became  less  liberal.  The  term 
of  existence  was  usually  limited,  bounties  ceased  to  be 
given,  power  to  amend  charters  was  reserved,  and  in  vari- 
ous ways  investors  were  warned  not  to  be  too  sanguine  in 
their  expectations.  And  there  was  always  a  warning  in 
the  very  character  of  the  business  carried  on  by  railroads. 
At  the  common  law  a  carrier  who  plies  his  trade  on  the 


THE  ECONOMIC  METHOD  299 

highway  is  subject  to  regulation.  He  makes  use  of  the 
highway  not  as  an  incident  to  his  other  business,  but  as 
an  essential  part  of  his  business.  Since  the  highway  is 
maintained  at  the  expense  of  the  public,  such  exceptional 
use  of  it  justifies  the  legislature  in  exacting  some  equiva- 
lent for  the  public  benefit.  This  may  be  done  by  requiring 
the  carrier  to  maintain  the  highway,  or  to  pay  part  of  the 
expense  of  maintaining  it ;  or  the  carrier  may  be  required 
to  serve  the  public  at  reasonable  rates. 

When  our  first  railroads  were  built,  it  seems  to  have 
been  supposed  that  they  were  enterprises  of  the  same  kind 
as  the  old  "  turnpike  "  companies.  These  companies  were 
empowered  to  lay  out  or  improve  highways,  and  to  reim- 
burse themselves  by  taking  toll  from  those  who  made  use 
of  their  improvements.  A  railroad,  it  was  thought,  would 
construct  its  line,  and  any  one  could  load  his  own  car  and 
haul  it  over  the  line,  as  a  farmer  drives  his  cart  over  a  turn- 
pike. This  theory  which,  grotesque  as  it  may  sound,  has 
been  seriously  propounded  by  some  modern  writers  as  the 
true  one,  was  very  soon  abandoned,  and  the  railroad  com- 
panies not  only  constructed  their  lines  but  also  conducted 
all  the  traffic  thereon.  But  as  their  lines  could  be  con- 
structed only  by  the  exercise  of  the  right  of  eminent  do- 
main, they  retained  some  of  the  legal  qualities  of  highways, 
and  the  companies  were  allowed  exclusive  rights  only  on 
the  ground  that  they  were  common  carriers.  As  common 
carriers  their  charges  have  always  been  subject  to  regula- 
tion by  the  state,  and  have  often  been  reduced  when  they 
were  unreasonably  high,  and  perhaps  sometimes  when  they 
were  not.  The  exceptional  inducements  held  out  to  inves- 
tors in  railroads,  therefore,  must  always  have  been  viewed 
in  the  light  of  this  possibility  of  governmental  regulation, 


300  THE  METHODS  OF  TAXATION 

and  the  proper  exercise  of  this  power  constitutes  no  dis- 
appointment of  reasonable  expectations.  ISTor  has  its 
proper  exercise,  perhaps,  been  regarded  as  unjust  by  the 
owners  of  railroad  property.  They  have  complained  not 
that  the  legislature  has  forbidden  them  to  exact  rates  that 
were  unreasonably  high,  but  that  it  has  compelled  them 
to  accept  rates  that  were  unreasonably  low.  The  question 
has  always  been,  and  is,  one  rather  of  fact  than  of  principle. 
The  owners  of  railroads,  like  the  owners  of  other  prop- 
erty, have  as  a  matter  of  course  been  subjected  to  taxation 
on  their  property ;  and  often,  too,  on  their  debts.  Whether 
they  should  be  subjected  to  a  higher  rate  of  taxation  de- 
pends partly,  as  we  have  seen,  on  the  rights  granted  them 
by  their  charters,  and  partly  on  the  relation  that  such  taxes 
bear  to  the  cost  of  furnishing  transportation.  It  must  be 
admitted  that  when  reasonable  rates  have  prevailed,  to  in- 
crease the  cost  of  furnishing  transportation,  whether  by 
taxes  or  by  other  means,  may  make  it  necessary  to  increase 
the  rates.  That  is  to  say,  a  tax  levied  on  the  railroad  may 
be  really  paid  by  those  who  travel  on  it,  or  whose  goods  are 
carried  by  it,  and  be  thus  ultimately  diffused  throughout 
the  whole  society.  Such  a  tax  may  or  may  not  be  advan- 
tageous ;  it  falls  into  the  class  of  taxes  on  the  transfers  of 
goods,  which  are  yet  to  be  considered.  So  far  as  the 
owners  of  a  railroad  obtain  more  than  the  ordinary  rate 
of  profit  under  the  guarantee  of  their  charter,  it  would 
seem  that  they  may  properly  charge  such  rates  as  will  give 
them  this  profit,  and  that  such  rates  cannot  justly  be  re- 
duced either  by  specific  ordinance  or  by  special  taxation. 
So  far  as  monopolistic  profit  is  not  secured  by  contract 
with  the  legislature,  it  may  be  reduced  by  lowering  rates 
so  as  to  extinguish  it,  or  by  imposing  taxes  without  permit- 


THE  ECONOMIC  METHOD  301 

ting  an  advance  in  rates.  When  such  a  reduction  takes 
place,  the  owner  of  railroad  property  is  deprived  of  an 
"  unearned  increment "  of  value.  Whether  he  can  be 
justly  so  deprived  depends  on  the  answer  to  the  question 
whether  all  unearned  increments  should  be  specially  taxed, 
or  only  those  owned  through  certain  kinds  of  corporations. 
Some  reasons  were  given  at  the  outset  for  believing  that  the 
conviction  that  it  would  be  unjust  to  deprive  individual 
owners  of  all  such  increment  in  the  value  of  their  land  was 
too  deeply  rooted  to  be  overthrown.  It  remains  to  consider 
whether  the  circumstance  that  the  individual  owns  land  in 
partnership  with  others,  by  means  of  a  railroad  corpora- 
tion, seems  properly  to  modify  this  conviction. 

[Reference  has  been  made  to  the  grants  of  land  made 
to  the  builders  of  railroads,  especially  by  the  general  gov- 
ernment. But  similar  grants  have  been  and  are  now  made 
to  individuals.  Many  millions  of  acres  have  been  bestowed 
in  this  way,  freely,  or  for  a  nominal  consideration.  Many 
of  these  millions  have  increased  enormously  in  value; 
lands  bought  for  a  dollar  or  two  an  acre  are  now  worth  a 
hundred  times  their  cost  to  the  first  occupant  A  certain 
part  of  this  increment  is  due  to  the  expenditure  of  labor 
on  the  lands.  A  large  part  of  it,  however,  is  due  to  the 
growth  of  population  and  to  the  construction  of  railroads, 
without  which  the  products  of  these  lands  could  not  have 
been  marketed.  This  cause  is  even  now  in  constant  opera- 
tion ;  new  lines  of  railroads,  operated  by  electricity  as  well 
as  steam,  are  every  year  adding  to  the  value  of  the  lands 
through  which  they  are  constructed.  The  most  impressive 
illustration  of  this  process  is  afforded  by  the  extension  of 
the  local  railroads  in  the  City  of  New  York,  to  which  allu- 
sion has  been  already  made.  When  the  elevated  railway 


304  THE  METHODS  OF  TAXATION 

common  law  and  in  our  constitutions.  The  title  of  the 
railroad  owner  is  of  modern  origin,  it  is  statutory,  and 
limited  to  a  special  use.  It  has  the  support  of  law,  but  not 
the  support  of  sentiment,  which  has  always  justified  the 
retention  by  the  freeholder  of  all  the  increase  in  the  value 
of  his  land,  be  it  earned  or  unearned.  The  freehold  has 
the  sacredness  of  a  home;  its  associations  make  it  much 
more  than  a  mere  embodiment  of  pecuniary  value.  The 
owner  spends  his  own  labor  on  it.  He  makes  his  living 
from  it,  and  he  has  an  intimate,  personal  interest  in  its 
products.  As  a  landlord  he  may  obtain  from  consumers 
prices  that  have  an  element  of  monopoly,  but  as  he  does 
not  directly  deal  with  consumers  they  do  not  realize  this. 
The  public  grumbles  at  the  high  prices  of  food,  but  it  never 
blames  the  farmer  for  them. 

There  is  nothing  sentimental  about  the  ownership  of 
a  share  in  a  railroad.  The  owner  can  pretend  no  attach- 
ment to  the  land  in  which  he  has  a  share.  He  cannot  plead 
his  affection  for  a  roadbed,  which  he  may  never  have  seen, 
which  he  cannot  use  as  a  home,  which  he  has  spent  no 
labor  on,  which  he  can  utilize  only  as  a  money  making 
machine,  and  by  means  of  agents  who  have  hardly  more 
personal  interest  in  it.  For  the  services  rendered  by  this 
machine  the  public  pays  directly  in  fares  and  charges,  and 
it  is  incessantly  watchful  over  their  amount.  It  admits, 
rather  grudgingly  perhaps,  that  the  owners  of  this  machine 
deserve  a  reasonable  compensation,  but  it  is  reluctant  to 
concede  that  this  compensation  should  include  the  element 
of  unearned  value.  The  law  may  recognize  this  claim, 
contracts  may  assert  it,  courts  may  enforce  it;  but  it 
lacks  the  moral  support  and  prestige  that  ancient  custom 
and  precedent  and  sentiment  have  thrown  about  the  absolute 


THE  ECONOMIC  METHOD  305 

right  of  the  individual  freeholder.  Whatever  may  be  true 
of  corporate  rights  acquired  in  the  past,  it  is  evident  that 
in  the  future,  unearned  increments  in  the  value  of  the  prop- 
erty of  public  corporations  are  not  likely  to  be  held  sacred, 
and  may  after  due  notice  be  subjected  to  special  taxation. 
As  has  been  observed,  there  may  be  a  monopoly  without 
monopolists.  All  the  shares  in  a  railroad  may  be  held  by 
persons  who  have  paid  prices  based  on  the  entire  value  of 
the  property,  earned  or  unearned,  and  who  may  receive  no 
more  than  the  ordinary  return  on  their  investments.  It 
would  be  unjust  to  confiscate  their  property;  but  hence- 
forth prudent  investors  will  hesitate  to  pay  for  prospective 
values,  which  public  opinion  may  justify  the  legislature 
in  annihilating  as  soon  as  they  come  into  existence. 

In  the  foregoing  statement  railroad  companies  have  been 
taken  to  illustrate  principles  that  apply  generally  to  com- 
panies acquiring  rights  in  trust  for  the  public.  Water 
companies,  and  telegraph  and  telephone  companies,  cannot 
operate  without  exercising  the  right  of  eminent  domain, 
and  are  as  subject  to  regulation  as  railroads.  Street  rail- 
ways and  companies  furnishing  light  may  occupy  a  slightly 
different  position.  Such  companies  must  make  use  of 
highways,  and  where  the  public  ownership  is  limited  to  the 
surface,  it  would  seem  that  abutting  owners  might  claim 
compensation  for  their  expropriation  from  the  soil  beneath 
and  the  air  above.  Where  the  fee  of  the  land  on  which  the 
highway  is  laid  out  belongs  to  the  public,  there  may  be  no 
occasion  to  condemn  private  property.  But  the  difference 
is  not  very  material.  In  every  case  certain  persons  are 
allowed  to  make  use  of  property  which  they  have  not 
acquired  by  grant  in  the  usual  form,  and  which  they  can 
use  only  for  a  purpose  and  on  terms  prescribed  by  a  public 

20 


304  THE  METHODS  OF  TAXATION 

common  law  and  in  our  constitutions.  The  title  of  the 
railroad  owner  is  of  modern  origin,  it  is  statutory,  and 
limited  to  a  special  use.  It  has  the  support  of  law,  but  not 
the  support  of  sentiment,  which  has  always  justified  the 
retention  by  the  freeholder  of  all  the  increase  in  the  value 
of  his  land,  be  it  earned  or  unearned.  The  freehold  has 
the  sacredness  of  a  home;  its  associations  make  it  much 
more  than  a  mere  embodiment  of  pecuniary  value.  The 
owner  spends  his  own  labor  on  it.  He  makes  his  living 
from  it,  and  he  has  an  intimate,  personal  interest  in  its 
products.  As  a  landlord  he  may  obtain  from  consumers 
prices  that  have  an  element  of  monopoly,  but  as  he  does 
not  directly  deal  with  consumers  they  do  not  realize  this. 
The  public  grumbles  at  the  high  prices  of  food,  but  it  never 
blames  the  farmer  for  them. 

There  is  nothing  sentimental  about  the  ownership  of 
a  share  in  a  railroad.  The  owner  can  pretend  no  attach- 
ment to  the  land  in  which  he  has  a  share.  He  cannot  plead 
his  affection  for  a  roadbed,  which  he  may  never  have  seen, 
which  he  cannot  use  as  a  home,  which  he  has  spent  no 
labor  on,  which  he  can  utilize  only  as  a  money  making 
machine,  and  by  means  of  agents  who  have  hardly  more 
personal  interest  in  it.  For  the  services  rendered  by  this 
machine  the  public  pays  directly  in  fares  and  charges,  and 
it  is  incessantly  watchful  over  their  amount.  It  admits, 
rather  grudgingly  perhaps,  that  the  owners  of  this  machine 
deserve  a  reasonable  compensation,  but  it  is  reluctant  to 
concede  that  this  compensation  should  include  the  element 
of  unearned  value.  The  law  may  recognize  this  claim, 
contracts  may  assert  it,  courts  may  enforce  it;  but  it 
lacks  the  moral  support  and  prestige  that  ancient  custom 
and  precedent  and  sentiment  have  thrown  about  the  absolute 


THE  ECONOMIC  METHOD  305 

right  of  the  individual  freeholder.  Whatever  may  be  true 
of  corporate  rights  acquired  in  the  past,  it  is  evident  that 
in  the  future,  unearned  increments  in  the  value  of  the  prop- 
erty of  public  corporations  are  not  likely  to  be  held  sacred, 
and  may  after  due  notice  be  subjected  to  special  taxation. 
As  has  been  observed,  there  may  be  a  monopoly  without 
monopolists.  All  the  shares  in  a  railroad  may  be  held  by 
persons  who  have  paid  prices  based  on  the  entire  value  of 
the  property,  earned  or  unearned,  and  who  may  receive  no 
more  than  the  ordinary  return  on  their  investments.  It 
would  be  unjust  to  confiscate  their  property;  but  hence- 
forth prudent  investors  will  hesitate  to  pay  for  prospective 
values,  which  public  opinion  may  justify  the  legislature 
in  annihilating  as  soon  as  they  come  into  existence. 

In  the  foregoing  statement  railroad  companies  have  been 
taken  to  illustrate  principles  that  apply  generally  to  com- 
panies acquiring  rights  in  trust  for  the  public.  Water 
companies,  and  telegraph  and  telephone  companies,  cannot 
operate  without  exercising  the  right  of  eminent  domain, 
and  are  as  subject  to  regulation  as  railroads.  Street  rail- 
ways and  companies  furnishing  light  may  occupy  a  slightly 
different  position.  Such  companies  must  make  use  of 
highways,  and  where  the  public  ownership  is  limited  to  the 
surface,  it  would  seem  that  abutting  owners  might  claim 
compensation  for  their  expropriation  from  the  soil  beneath 
and  the  air  above.  Where  the  fee  of  the  land  on  which  the 
highway  is  laid  out  belongs  to  the  public,  there  may  be  no 
occasion  to  condemn  private  property.  But  the  difference 
is  not  very  material.  In  every  case  certain  persons  are 
allowed  to  make  use  of  property  which  they  have  not 
acquired  by  grant  in  the  usual  form,  and  which  they  can 
use  only  for  a  purpose  and  on  terms  prescribed  by  a  public 

20 


306  THE  METHODS  OF  TAXATION 

authority.  When  property  so  acquired  advances  in  value 
through  other  causes  than  the  expenditure  of  the  grantee's 
capital  thereon,  the  principles  already  stated  in  the  case 
of  railroads  seem  to  apply.  The  right  to  the  enhanced 
value  may  be  secured  to  the  owners  of  the  property  by  con- 
tract; or,  if  not,  this  value  may  be  subjected  to  special 
taxation  by  means  of  franchise  taxes  or  higher  assess- 
ments, or  it  may  be  extinguished  by  lowering  the  charges 
for  the  services  rendered  to  the  public  so  as  to  produce 
only  the  ordinary  return  on  the  capital  invested.  Both 
processes  may  conform  to  the  progressive  method ;  whether 
they  conform  to  the  economic  method  is  a  question  more 
difficult  to  answer. 

According  to  the  established  doctrine  of  economics,  the 
owner  of  a  monopoly  fixes  the  price  charged  for  his  com- 
modity at  such  a  rate  as  to  bring  him  the  greatest  possible 
profit.  As  has  been  pointed  out,  this  may  be  only  the  or- 
dinary or  reasonable  profit,  which  cannot  properly  be  sub- 
jected to  exceptional  taxation.  When  the  profit  is  greater, 
the  gross  receipts  of  the  monopoly  may  be  taxed ;  but  the 
result  might  be  to  make  it  for  the  advantage  of  the  monop- 
olist to  furnish  less  of  his  commodity  at  a  higher  price. 
His  gross  receipts  and  his  net  receipts  might  both  be  dimin- 
ished, but  the  latter  to  a  less  degree  than  the  former.  A 
tax  on  net  receipts,  or  a  tax  on  the  monopoly  as  a  unit, 
cannot  be  thus  avoided.  As  it  seems  impossible  to  devise 
any  satisfactory  method  of  taxing  monopolies  as  units, 
the  tax  on  net  receipts  is  properly  adopted.  It  may  be 
levied  directly;  but  the  same  result  might  be  attained  by 
taxing  the  property  of  the  monopoly,  if  its  value  could  be 
precisely  determined.  This  is  what  is  attempted  in  taxing 
what  are  called  franchises,  as  is  now  done  in  the  State  of 


THE  ECONOMIC  METHOD  307 

!New  York.  The  courts  held  that  the  rights  in  the  high- 
ways enjoyed  by  various  companies  were  not  taxable  as 
real  estate.  The  value  of  these  rights  had  become  very 
great,  and  they  would  seem  to  be  properly  easements,  but 
as  the  law  stood  they  were  not  so  classified.  The  amended 
law  in  effect  made  them  taxable  under  the  name  of  special 
franchises.  Had  they  been  assessed  as  personal  property, 
the  debts  of  the  companies  might  have  been  deducted,  thus 
leaving  nothing  subject  to  the  tax.  A  franchise  in  this 
sense  may  be  defined  as  a  right  to  operate,  but  as  this  right 
must  be  exercised  by  means  of  the  easements  in  the  streets, 
the  value  of  the  franchise  and  the  value  of  the  easement 
are  practically  the  same. 

The  important  point  is  that  this  value  must  be  measured 
by  the  profits  of  the  company.  If  it  does  not  earn  any- 
thing its  franchise  is  worth  nothing.  We  are  thus  brought 
back  to  the  taxation  of  net  receipts  as  the  only  practicable 
method.  The  problem  is  really  one  of  assessment.  If  we 
would  tax  property  we  must  assign  it  a  value,  and  we  must 
be  guided  by  the  rent  or  profit  that  the  property  will 
produce.  When  we  have  to  deal  with  the  property  of  a 
company  of  this  kind,  we  find  it  impossible  to  assign 
values  to  the  several  parcels  of  which  it  is  composed.  The 
fact  that  a  parcel  might  have  a  certain  value  if  used  for 
another  purpose  is  immaterial;  it  is  essentially  a  part  of 
a  complex  whole.  We  cannot  say  of  a  locomotive  engine 
that  this  wheel  has  a  certain  value  and  that  cylinder  an- 
other; even  if  we  could  ascertain  the  cost  of  producing 
the  separate  parts  we  should  not  know  the  earning  power 
of  the  machine,  and  it  is  that  which  fixes  its  value.  The 
attempt  to  tax  a  railroad  piecemeal  leads  to  inequalities 
in  assessment  that  may  without  exaggeration  be  described 


308  THE  METHODS  OF  TAXATION 

as  frightful.  Local  assessors  are  under  a  constant  pres- 
sure to  assess  the  owners  of  such  property,  who  have  no 
votes,  at  the  highest  possible  figure,  as  this  enables  them 
to  reduce  the  taxes  of  their  neighbors,  by  whose  votes  they 
hold  office.  But  when  a  railroad  constructs  a  costly  bridge 
the  increased  value  seems  properly  assessable  as  belonging 
to  the  railroad  as  a  whole,  and  not  to  that  part  of  it  situ- 
ated in  a  particular  taxing  district. 

A  recent  investigation  by  a  parliamentary  commission 
in  England  has  disclosed  many  striking  instances  of  such 
inequality.  In  addition  to  the  stamp  taxes,  the  passenger 
tax,  and  the  income  tax,  railway  property  is  assessed  to  the 
rates  or  local  taxes,  usually  at  very  high  figures.  In  one 
parish  the  land  of  the  Great  Western  Railway  is  rated  at 
£284  an  acre,  other  lands  at  £3  6s.  The  Midland  Railway 
pays  in  180  parishes  from  16  per  cent  to  83  per  cent  of 
the  rates,  while  its  acreage  never  exceeds  five  per  cent  and 
does  not  average  two  per  cent.  In  60  parishes  the  rates 
paid  by  the  railway  are  more  than  half  the  total  assess- 
ment. In  166  parishes  the  land  of  the  railway  is  rated  at 
from  £23  to  £345  an  acre,  the  rest  of  the  land  being  rated 
from  9s.  6d.  to  £8  8s.  an  acre.  The  controversies  over  the 
ratings  in  the  larger  towns  are  often  very  expensive  and 
inconclusive.  Professional  valuers  have  in  some  cases 
bargained  with  the  authorities  for  a  commission  on  what- 
ever increase  in  the  assessment  they  may  establish,  an  ar- 
rangement that  obviously  impairs  the  weight  of  their  evi- 
dence. The  whole  matter  seems  to  be  in  as  deplorable  a 
state  of  confusion  in  England  as  in  this  country,  and  it 
should  obviously  be  regulated  by  a  central  authority,  having 
power  to  assess  net  earnings  and  to  apportion  the  proceeds 
of  the  tax  thereon  among  the  localities  according  to  a 


THE  ECONOMIC  METHOD  309 

fixed   principle;    or  having  power   at  least  to  equalize 
assessments. 

We  cannot  here  examine  the  details  of  the  methods 
adopted  in  the  different  states  in  dealing  with  this  diffi- 
culty, but  attention  should  be  directed  to  an  ingenious 
compromise  which  is  practicable  when  the  property  of 
a  monopoly  lies  within  a  single  taxing  district.  The  South 
Metropolitan  Gas  Company  of  London  has  for  a  long  time 
operated  under  such  a  system,  its  charges  for  gas  and  its 
dividends  being  inversely  proportioned.  Whenever  the 
company  reduces  the  price  of  gas  one  penny  per  thousand 
feet,  its  standard  dividend  may  be  raised  one  farthing,  or 
five  shillings  per  cent.  The  shares  of  the  consumers  and 
of  the  stockholders  are  stated  to  be  about  as  thirty-five  to 
six.  Hence  if  the  assessment  of  the  company  is  increased 
too  much,  the  consumers  pay  six-sevenths  of  the  excess. 
Probably  no  better  system  of  dealing  with  public  service 
companies  operating  within  the  limits  of  municipalities 
can  be  devised,  and  where  it  has  been  introduced  in  this 
country  the  results  seem  to  have  been  satisfactory.  The 
plan  has  the  advantage  of  calling  the  attention  of  the 
consumer  to  the  fact  that  special  taxation  imposed  on  the 
company  may  enhance  the  price  of  the  commodity  fur- 
nished. So  far  as  the  company  is  concerned,  it  makes  little 
difference  whether  it  pays  a  higher  tax  and  charges  more 
for  its  product,  or  pays  a  lower  tax  and  charges  a  smaller 
price.  To  the  individual  consumer  the  difference  may  be 
material.  He  may  consume  little  gas,  but  pay  a  large  tax 
on  his  property,  and  he  is  thus  interested  rather  in  having 
taxes  lower  than  gas  cheaper.  Hence  it  may  seem  more 
equitable,  within  certain  limits,  to  increase  the  tax  as  the 
dividend  increases,  rather  than  to  lower  the  price  of  gas. 


310  THE  METHODS  OF  TAXATION 

Such  a  tax  is  collected  with  very  little  expense,  and  when 
first  imposed  might  conform  to  the  progressive  as  well 
as  to  the  economic  method. 

This  illustration  brings  us  face  to  face  with  the  great 
question  whether  it  is  desirable  to  tax  transportation,  or 
the  physical  transfer  of  persons  and  things.  Strong  argu- 
ments can  be  advanced  in  support  of  the  proposition  that 
no  such  taxation  should  be  imposed.  All  the  property  of 
railroad  companies  might  be  exempted  from  taxation,  while 
the  rates  charged  might  be  fixed  so  as  to  bring  the  owners 
only  a  reasonable  return  on  their  investment.  To  the 
objection  that  this  would  be  to  confer  a  favor  on  those 
whose  goods  are  transported,  the  answer  is  that  whatever 
saving  in  freight  might  be  thus  caused  would  be  substan- 
tially a  reduction  in  the  cost  of  producing  goods,  and 
would  thus  benefit  the  whole  body  of  consumers.  But  this 
answer  is  not  so  conclusive  in  the  case  of  passengers. 
Much  travel  is  to  be  classed  as  luxurious  expenditure,  and 
to  diminish  its  cost  to  the  persons  who  indulge  in  it,  at 
the  expense  of  the  public,  would  be  unjust.  It  is  true  that 
many  foreign  municipalities  carry  on  transportation  and 
other  functions  on  this  principle;  they  own  their  own 
roads  or  plants,  and  serve  the  public  at  lower  rates  than 
would  be  necessary  if  they  paid  taxes.  But  what  the 
passengers  save  must  be  made  up  in  some  way ;  either  the 
passengers  must  pay  higher  taxes,  or  other  people  must, 
and  it  seems  reasonable,  since  the  passengers  must  pay 
a  part  of  the  cost  of  their  transportation,  that  they  should 
pay  the  whole  of  it.  In  this  country,  where  municipali- 
ties have  not  to  any  great  extent  engaged  in  trade,  it  is 
probable  that  public  opinion  would  condemn  a  proposal 
to  exempt  the  business  of  transportation  from  taxation  by 


THE  ECONOMIC  METHOD  311 

exempting  property  employed  in  that  business.  Nor  are 
the  fiscal  advantages  of  such  a  policy  so  clear  as  to  en- 
courage the  belief  that  public  opinion  on  this  point  could 
be  changed. 

We  may  therefore  assume  that  railroad  property  is  to 
be  taxed;  and,  if  it  is  earning  only  a  reasonable  profit, 
its  taxes  cannot  be  increased  without  an  increase  in  the 
charges  for  its  service.  Otherwise  new  capital  could  not 
be  obtained  for  extensions  and  improvements  needed  in 
the  business  of  the  country.  ~Now  the  fiscal  advantages 
of  a  tax  on  transportation  are  very  great,  and  the  ad- 
vantages of  a  surtax  are  even  greater,  because  the  cost 
to  the  treasury  of  collecting  a  large  sum  is  no  more  than 
that  of  collecting  a  small  one.  So  far  as  passengers  are 
concerned,  the  tax  is  collected  at  the  very  moment  of  con- 
sumption, so  to  speak;  the  passenger  pays  as  he  goes, 
and  it  costs  the  railroad  company  no  more  to  collect  a 
high  fare  than  a  low  one.  The  tax,  too,  may  be  progres- 
sive. The  English  government,  as  has  been  noted,  taxes 
the  receipts  from  passengers  paying  the  higher  fares ;  but 
the  tax  being  on  gross  receipts,  third  class  travel  has  been 
much  favored,  somewhat  to  the  loss  of  the  treasury.  Were 
it  not  for  the  complication  introduced  through  the  reduc- 
tion of  fares  to  such  passengers  as  ride  for  short  distances 
daily,  taxation  of  this  kind  would  have  few  disadvantages. 
Two  conditions  are  extremely  favorable;  fares  are  as  a 
rule  proportioned  to  distance  traveled,  and  human  beings 
are  not  classified,  except  to  an  insignificant  extent.  In 
our  practice,  the  rates  charged  for  luxurious  travel  are 
relatively  low;  they  might  be  raised  by  taxation  without 
increasing  the  number  of  classes  of  passengers.  Were  the 
several  states  to  agree  upon  uniform  laws,  a  large  revenue 


312  THE  METHODS  OF  TAXATION 

might  be  derived  from  this  "traffic  at  a  very  small  expense, 
and  without  serious  injustice. 

Part  of  the  cost  of  carrying  passengers  may  be  paid 
now  in  some  cases  out  of  receipts  from  carrying  freight, 
and  vice  versa;  but  such  inequalities  must  in  practice  be 
disregarded.  Merchandise  and  men  are  totally  different 
commodities.  Their  transportation  involves  different  prin- 
ciples and  requires  different  methods.  Passenger  fares 
are  on  the  whole  to  be  classified  as  expense,  like  other 
disbursements  for  direct  personal  consumption.  Freight 
charges  are  more  properly  treated  as  elements  in  cost  of 
production.  Passengers  we  scarcely  need  to  classify  at 
all ;  of  freight  the  number  of  classes  is  infinite,  and  neces- 
sarily so.  Charges  for  carrying  freight  are  not,  and  cannot 
be,  proportioned  to  distance;  there  are  a  hundred  other 
elements  in  the  problem.  Things  differ  in  value,  in  bulk, 
in  weight,  in  fragility,  in  durability,  in  composition,  in 
a  hundred  respects;  who  can  measure  the  difference  in 
the  cost  of  transporting  a  carload  of  dynamite  and  a 
carload  of  butter?  It  is  altogether  beyond  human  power 
to  apportion  the  expense  of  terminal  facilities,  for  ex- 
ample, among  hundreds  of  different  commodities,  carried 
different  distances,  many  of  which  may  never  reach  a 
terminal  at  all.  The  course  of  traffic  is  often  such  that 
many  cars  after  being  unloaded  must  be  sent  back  empty 
unless  they  are  filled  with  goods  carried  at  extremely  low 
rates.  It  costs  little  more  to  haul  loaded  than  empty  cars ; 
if  they  are  hauled  empty,  the  cost  must  be  made  up  by 
higher  charges  on  the  freight  that  is  carried.  As  a  rule 
it  costs  less  to  transport  goods  by  water  than  by  land. 
When  a  railroad  extends  between  two  points  between  which 
water  transportation  takes  place,  the  railroad  must  carry 


THE  ECONOMIC  METHOD  313 

at  as  low  rates  as  the  vessel,  or  not  at  all.  It  may  be  able 
to  carry  the  freight  at  these  low  rates  if  it  charges  high 
rates  to  places  between  the  competing  points;  and  if  it 
does  not  obtain  those  high  rates,  it  may  be  impossible  for 
it  to  operate.  The  very  small  profit  from  the  competitive 
freight  must  be  made  up  for  by  larger  profit  from  the 
non-competitive  freight;  but  this  small  profit  may  make 
all  the  difference  between  prosperity  and  ruin.  Com- 
plaints, often  violent  complaints,  will  be  heard  from  the 
interior  towns ;  superficially  they  seem  to  be  discriminated 
against  unjustly.  But  the  fact  may  be  that  without  such 
apparent  discrimination  these  towns  could  have  no  rail- 
road service  at  all.  Their  location,  not  the  policy  of  the 
railroad,  discriminates  against  them. 

The  system  of  charges  for  carrying  freight  has  been 
developed  with  enormous  labor.  It  has  taxed  the  ingenu- 
ity of  the  ablest  men,  and  it  is  perhaps  surprising  that 
they  have  been  able  to  attain  success  at  all.  The  mechan- 
ism is  so  prodigiously  complicated  as  to  make  it  almost 
impossible  to  calculate  what  will  be  the  result  of  changing 
a  single  rate.  No  general  principles  can  be  applied,  no 
theories  are  found  to  work.  The  existing  body  of  rules 
is  a  growth,  the  product  of  innumerable  forces,  the  result 
perhaps  as  much  of  chance  as  of  design.  Chaotic  and 
irrational  as  it  may  seem,  to  reconstruct  it  would  revolu- 
tionize trade.  It  would  destroy  the  prosperity  of  many 
towns,  it  would  ruin  many  enterprises,  and  it  cannot  be 
said  that  any  other  system  has  been  devised  that  promises 
much  improvement.  Not  only  must  the  interests  of  in- 
dividuals be  regarded,  but  the  rivalries  of  cities,  the  jeal- 
ousies of  states,  the  intricacies  of  foreign  trade  and  foreign 
commercial  policies.  Were  the  commerce  of  the  coun- 


314  THE  METHODS  OF  TAXATION 

try  wholly  under  the  control  of  the  general  government, 
it  is  perhaps  conceivable  that  some  plan  for  its  equitable 
taxation  might  be  conceived.  As  it  is,  there  seems  to  be 
little  reason  to  think  that  the  governments  of  the  several 
states  could  be  induced  to  agree  upon  uniform  laws,  even 
if  they  were  capable  of  framing  them.  The  conclusion 
appears  unavoidable  that  any  attempt  to  tax  the  trans- 
portation of  goods  is  likely  to  cause  so  much  injustice  as 
to  outweigh  its  obvious  fiscal  advantages.  The  taxes  now 
imposed  on  railroad  property  are,  it  must  be  admitted, 
taxes  on  transportation,  but  they  have  perhaps  become  a 
recognized  element  in  cost  of  production,  and  with  a 
rational  system  of  assessment  they  might  be  made  to  meet 
the  requirements  of  the  fiscal  method. 

The  main  conclusions  on  this  subject  may  be  briefly  re- 
stated. Assuming  that  more  than  ordinary  profits  are 
obtained  by  an  individual  or  a  company  exercising  a 
monopoly  unprotected  by  legislative  contract,  these  profits 
may  be  reduced  in  two  ways.  The  thing  or  service  fur- 
nished by  the  monopoly  may  be  of  such  a  kind  that  its 
price  can  be  lowered  by  law  to  a  reasonable  figure.  Or, 
both  in  such  a  case,  and  when  prices  cannot  be  fixed  by 
statute,  the  property  owned  by  the  monopoly  may  be  as- 
sessed at  a  rate  corresponding  with  its  value  as  indicated 
by  the  profit  that  can  be  made  from  it.  In  both  cases,  what 
may  be  regarded  as  an  unearned  value  is  taken  from  the 
owners  of  the  monopoly  and  distributed,  in  the  former 
instance,  among  the  consumers  of  the  product  affected; 
in  the  latter,  among  the  whole  body  of  taxpayers.  The 
latter  course  seems  more  equitable,  as  involving  no  dis- 
crimination in  favor  of  a  particular  class  of  consumers; 
yet  the  power  to  fix  charges  must  be  held  in  reserve  by 


THE  ECONOMIC  METHOD  315 

the  government,  even  if  not  actually  exercised.  If  the 
latter  course  is  adopted,  the  monopoly  may  be  taxed  either 
on  its  net  receipts,  a  process  that  implies  some  valuation 
of  its  investment  of  capital;  or  on  this  investment,  in 
assessing  which  the  net  receipts  above  operating  expenses 
should  be  taken  into  account.  Owing  to  the  imperfect 
manner  in  which  the  accounts  of  companies  rendering 
public  service  have  been  frequently  kept  in  the  past,  it 
is  impossible  to  determine  the  amount  of  their  investments, 
and  justice  seems  on  the  whole  more  likely  to  be  attained 
by  adopting  some  principle  of  assessment  based  on  the 
experience  of  many  companies  and  communities  in  their 
struggles  to  assign  a  definite  meaning  to  the  term  net 
receipts. 

It  must  be  added  that  all  reasonings  and  conclusions 
concerning  monopoly  are  so  speculative  as  to  have  little 
practical  value.  This  is  because  monopoly  value  is  found 
everywhere  and  in  every  degree.  It  implies  some  differ- 
ential advantages,  and  such  advantages  are  not  only  num- 
berless but  also  extremely  variable  and  sensitive  to  changed 
conditions.  Property  in  land  is  not  intrinsically  of  the 
nature  of  monopoly,  for  much  land  produces  no  rent.  But 
property  in  a  certain  piece  of  land  may  have  a  monopoly 
value,  and  we  should,  strictly  speaking,  treat  every  one 
of  the  millions  of  pieces  of  land  owned  by  our  citizens 
and  bearing  rent  as  a  distinct  monopoly.  In  a  broad  sense 
they  are  all  in  competition  with  one  another,  and  their 
value  is  constantly  fluctuating.  The  same  is  true  of  other 
monopolies.  They  cannot  be  classified;  every  one  must 
be  considered  by  itself.  There  is  no  such  thing  as  a 
complete  monopoly.  The  general  government  assumes  to 
monopolize  the  transportation  of  letters;  it  prosecutes 


316  THE  METHODS  OF  TAXATION 

those  who  would  compete  with  it.  But  even  this  monopoly 
is  very  imperfect.  The  express  companies,  the  telegraph 
and  telephone  companies,  limit  it.  A  patent  right  is  ap- 
parently as  complete  a  monopoly  as  can  exist;  but  many 
things  may  be  substituted  for  a  thing  that  is  patented. 
Electricity  competes  with  gas,  and  oil  with  both.  Cisterns, 
springs,  and  artesian  wells  compete  with  water  companies. 
Carriages  drawn  by  horses  or  propelled  by  electricity  com- 
pete with  tramways,  and  all  compete  with  railways,  and 
so  do  sailing  vessels  and  steamships,  which  compete  also 
with  each  other.  The  monopoly  supposed  to  be  enjoyed 
by  one  railway  may  be  far  less  complete  than  that  of  an- 
other. The  'New  York  Central  railway  has  many  com- 
petitors among  railways,  and  it  has  besides  a  formidable 
competitor  in  the  Erie  canal,  for  the  maintenance  of  which 
it  is  itself  heavily  taxed.  This  competition  between  en- 
terprises carrying  on  the  same  business,  together  with  the 
competition  of  enterprises  offering  substituted  services, 
makes  the  situation  of  every  monopoly  different  from 
that  of  every  other.  To  institute  a  comparison  between 
two  great  railroad  systems,  if  the  result  is  to  have  any 
scientific  value,  necessitates  investigation  of  the  most  labo- 
rious character,  and  requires  so  much  time  that  when  the 
later  stages  of  the  inquiry  have  been  reached  the  earlier 
ones  have  already  become  obsolete.  The  attempt  to  tax 
monopolies,  therefore,  must  produce  a  great  deal  of  in- 
equality, and  it  involves  so  much  expense  for  investiga- 
tion as  to  make  it  a  very  questionable  expedient  from  the 
point  of  view  of  the  fiscal  method. 

We  have  so  far  confined  our  attention  to  companies 
owning  chiefly  real  estate  and  tangible  personalty  of  a 
durable  nature.  But  many  companies  and  individuals 


THE  ECONOMIC  METHOD  317 

own  little  real  estate,  their  wealth  consisting  almost  en- 
tirely of  personal  property,  either  tangible  or  intangible, 
while  a  large  class  owns  intangible  property  almost  ex- 
clusively. Merchants  often  carry  on  business  in  rented 
stores,  and  as  a  rule  perhaps  their  holdings  of  real  prop- 
erty are  relatively  small.  They  are,  under  modern  con- 
ditions, both  debtors  and  creditors  on  a  large  scale.  A 
mercantile  concern  may  have  a  shop  piled  full  of  goods 
in  which  its  ownership  is  very  limited.  They  may  not 
even  have  been  bought,  but  are  to  be  sold  on  commission ; 
and  even  if  they  have  been  bought  they  may  not  have  been 
paid  for,  and  will  not  be,  until  they  are  sold.  Even  then 
payment  is  not  made  in  money  but  in  promises,  and  the 
banks  are  called  on  to  cash  these  promises.  But  they  cash 
them  for  the  most  part  by  the  use  of  other  promises,  either 
their  own  or  those  of  the  government;  either  by  credits 
or  by  currency.  Hence  it  is  a  matter  of  no  little  diffi- 
culty for  a  mercantile  company  to  know  just  how  much 
it  is  worth.  To  determine  this  accurately,  it  would  have 
to  know  just  how  much  numerous  other  concerns  are  worth, 
all  of  whom  would  labor  under  similar  difficulties. 

Under  these  circumstances  it  is  evident  that  the  assessor 
can  form  little  idea  of  the  amount  of  property  owned  by 
a  trader.  He  is  obliged  to  be  governed  largely  by  indi- 
cations that  are  liable  to  be  deceptive,  and  that  are  often 
intentionally  made  so.  He  must  fall  back  on  the  method 
of  disclosure,  of  the  evils  of  which  enough  has  been  said. 
Many  merchants  would  not  dare  to  make  a  true  statement 
of  their  condition  to  the  tax-gatherer;  it  would  some- 
times put  it  in  his  power  to  ruin  them.  Many  do  not 
choose  to  make  such  statements,  because  they  know  that 
their  enemies  in  trade  will  not  make  them,  and  they  are 


318.  METHODS  OF  TAXATION 

not  inclined  to  pay  their  enemies'  taxes  by  increasing  their 
own.  In  considering  the  general  property  tax  we  have 
already  remarked  the  evanescent  nature  of  merchandise. 
Much  of  it  is  produced  and  consumed  before  it  can  be 
assessed,  and  it  is  in  constant  motion,  accelerated  often 
by  the  approach  of  the  period  of  assessment.  Such  prop- 
erty can  be  taxed  only  by  guessing  at  its  average  amount, 
year  by  year,  with  such  aid  as  the  owner  chooses  to  afford. 
It  is  obvious  that  all  manner  of  injustice  may  be  perpe- 
trated when  such  taxation  is  imposed,  and  as  most  of  the 
monopolies  in  trade  are  maintained  by  the  policy  of  the 
government,  to  tax  them  seems  unreasonable.  Such  other 
monopolies  as  exist  may  be  presumed  to  owe  their  success 
to  the  ability  of  their  managers,  and  to  burden  them  is  not 
likely  to  benefit  the  community.  In  view  of  these  facts, 
and  of  the  expense  and  annoyance  involved  in  the  process, 
the  taxation  of  personal  property  employed  in  trade  seems 
not  compatible  with  the  fiscal  method,  and  in  some  com- 
paratively enlightened  communities  it  is  not  attempted. 
Were  it  carried  out,  the  burden  would  not  remain  on  the 
owners  of  such  property,  but  would  be  diffused  throughout 
the  community;  and  it  seems  impracticable  to  confine  the 
burden  to  unearned  values,  their  amount  being  quite 
indeterminate. 

The  case  of  persons  and  companies  owning  and  dealing 
in  intangible  property  as  a  business  has  been  extremely 
complicated  by  legislation.  In  a  primitive  state,  barter 
is  facilitated  by  the  use  of  the  precious  metals.  Promises 
to  pay  would  not  have  been  acceptable,  because  the  judicial 
machinery  for  enforcing  such  promises  had  not  been  de- 
veloped. But  it  was  discovered  long  ago  that  a  very  great 
saving  could  be  made,  if  promises  to  pay  could  be  sub- 


THE  ECONOMIC  METHOD  319 

stituted  for  actual  payment  in  coin,  and  the  governments 
of  the  world,  after  innumerable  more  or  less  successful 
attempts  to  defraud  their  subjects,  have  now  established 
tolerably  stable  and  honest  systems  of  credit  currency. 
Modern  barter,  however,  is  conducted  on  such  a  colossal 
scale  as  to  require  far  greater  facilities  than  these  systems 
provide,  and  the  development  of  our  credit  system  has 
brought  into  existence  a  great  number  of  institutions  whose 
office  it  is  to  trade  in  claims  or  evidences  of  indebtedness 
of  every  description.  Such  institutions  may  be  called 
generically  banks,  and  that  term  may  be  conveniently  ap- 
plied to  individuals  as  well  as  corporations  dealing  in  what 
is  called  money,  but  which  would  perhaps  better  be  called 
credit. 

It  is  true  that  all  the  countless  millions  of  promises  to 
pay  outstanding  at  any  moment  are  ultimately  solvable 
in  the  precious  metals ;  but,  paradoxically  enough,  men  do 
not  desire  such  payment  unless  they  fear  that  they  cannot 
get  it.  The  possibility  of  this  demand,  however,  makes  it 
necessary  for  the  banks  to  keep  such  a  quantity  of  coin 
on  hand  as  experience  has  shown  to  be  necessary  to  meet 
it,  and  to  that  extent  bankers  are  owners  of  tangible  prop- 
erty. But  this  is  an  incident  of  their  business  which  needs 
not  here  be  considered;  the  property  of  a  bank  consists 
essentially  in  its  ownership  of  credits  or  claims  for  the 
payment  of  money,  and  its  profits  are  made  by  acquiring 
such  claims  and  transferring  and  issuing  them.  Owing 
to  a  misunderstanding  of  this  fact,  which  has  even  at  the 
present  day  not  been  dispelled,  legislatures  have  imposed 
many  conditions  that  have  operated  injuriously.  To  the 
unreflecting  mind,  wealth  means  money,  and  the  ordinary 
legislator  is  prone  to  regard  an  issue  of  promises  to  pay 


320  METHODS  OF  TAXATION 

as  a  creation  of  capital.  It  seems  obvious  enough  now, 
although  it  required  a  long  and  bitter  experience  on  the 
part  of  the  colonies,  to  say  nothing  of  that  of  the  general 
government,  to  disclose  it,  that  a  promise  to  pay  has  little 
value  unless  the  promisor  has  the  means  of  performance. 
Yet  even  after  the  states  were  prohibited  by  the  constitu- 
tion from  issuing  bills  of  credit,  they  persisted  up  to  the 
time  of  the  Civil  War  in  granting  charters  practically 
authorizing  this  practice,  and  these  charters  were  fre- 
quently issued  to  very  irresponsible  parties. 

There  seems  no  particular  reason  why  anybody  should 
not  sell  his  promise  to  pay  coin  if  he  can  find  a  customer 
for  it,  and  there  is  little  doubt  that  if  the  government 
had  not  interfered,  the  bankers  of  the  country  would  have 
developed  a  sound  and  scientific  currency  system.  But 
this  was  prevented  by  the  action  of  government  in  monopo- 
lizing this  right,  or  in  granting  it  as  a  privilege  to  those 
whom  it  favored.  And  owing  to  the  misunderstanding 
above  referred  to,  the  supervision  of  the  issue  of  notes  or 
bills  of  credit,  rendered  necessary  by  the  policy  of  the 
government,  was  extended  to  banks  of  discount,  or  the 
banking  business  proper.  If  the  business  of  issuing  notes 
payable  to  bearer  as  a  substitute  for  coin  was  to  be  monopo- 
lized, it  may  have  been  proper  enough  for  the  government 
to  provide  that  those  exercising  the  monopoly  should  fur- 
nish security  for  the  payment  of  their  notes.  In  the 
numberless  transactions  of  daily  life,  there  is  no  time  to 
investigate  the  solvency  of  those  whose  paper  is  employed 
as  currency,  and  the  conditions  that  prevailed  before  the 
national  system  was  established  were  such  as  to  make  that 
system  appear  like  a  transition  from  barbarism  to  civi- 
lization. But  there  was  no  reason  for  extending  the 


THE  ECONOMIC  METHOD  321 

monopoly  to  the  banking  business  proper.  The  solvency 
of  a  bank  concerns  only  its  depositors  and  stockholders, 
and  had  it  not  been  for  governmental  interference,  ex- 
ercised by  legislators  frequently  dishonest  and  almost 
always  ignorant,  the  bankers  of  the  country  would  have 
established  rules  that  would  have  protected  the  commun- 
ity against  unscrupulous  speculators.  The  ablest  and  most 
successful  men  in  a  community  usually  direct  its  banks, 
and  by  their  achievements  in  maintaining  our  vast  struc- 
ture of  credit  in  times  of  panic  they  have  repeatedly  proved 
their  capacity.  The  severity  of  these  crises  is  aggravated 
by  the  conditions  created  by  the  banking  laws;  but  by 
combinations  unrecognized  by  law  the  bankers  have  over- 
come many  of  these  obstacles. 

These  observations  are,  Jiowever,  rather  beside  the  mark. 
We  have  to  deal  with  the  taxation  of  banks,  and  must 
assume  that  they  will  continue  to  be  conducted  under  the 
existing  laws.  The  general  government  grants  the  privi- 
lege of  issuing  notes  to  corporations  that  will  deposit  its 
bonds  as  security,  and  imposes  a  tax  on  the  exercise  of 
the  privilege.  Such  a  tax  cannot  be  peculiarly  burden- 
some to  these  corporations.  Unless  the  men  who  organized 
them  were  satisfied  that  the  investment  would  be  profit- 
able they  would  not  engage  in  it  They  make  allowance 
for  taxation,  as  they  make  allowance  for  rent  and  for 
clerk  hire.  The  tax  therefore  falls  on  the  use  of  that 
peculiar  contrivance,  the  substitution  of  paper  for  coin. 
Whatever  saving  is  thus  attained  would  enure  to  the  com- 
munity, were  the  use  of  the  contrivance  free.  Its  re- 
striction gives  it  a  monopoly  value,  which  it  is  certainly 
proper  for  the  government  to  appropriate.  Were  there 
an  unlimited  supply  of  government  bonds,  the  restriction 

21 


322  METHODS  OF  TAXATION 

would  be  less  severe,  but  it  would  still  exist,  and  the  value 
created  by  it  is  a  value  to  which  the  whole  community 
is  entitled.  Owing  to  the  exact  form  in  which  the  ac- 
counts of  national  banks  are  necessarily  kept,  a  tax  on 
their  notes  is  collected  with  little  expense  and  with  no 
opportunity  for  evasion.  Such  a  tax  might  be  made  to 
conform  in  every  respect  to  the  requirements  of  the  fiscal 
method. 

The  taxation  of  the  banks  of  discount,  which  are  to  a 
great  extent  corporations  organized  under  state  laws,  pre- 
sents more  difficult  problems.  Their  property,  as  repre- 
sented by  their  authorized  capital  stock  and  surplus,  is 
usually  subject  to  assessment  at  the  place  where  their 
business  is  carried  on,  and  there  is  thus  no  uniformity  in 
the  rate  of  taxation.  Where  it  is  made  uniform,  it  may 
bear  little  relation  to  the  earning  power  of  the  bank,  and 
it  is  not  always  practicable  to  ascertain  the  market  value 
of  the  stock.  Dealings  in  such  stock  are  comparatively 
infrequent,  and  the  quotations  of  its  price  are  not  con- 
clusive evidence  of  its  value.  But  whatever  method  of 
taxation  is  adopted,  it  cannot  be  maintained  that  it  will 
constitute  a  peculiar  burden  on  those  who  invest  their 
money  in  the  business.  Trade  cannot  be  carried  on  with- 
out borrowing,  and  the  rate  of  interest  is  controlled  by 
the  relation  between  the  supply  of  capital  and  the  demand 
for  it.  Whatever  makes  it  more  difficult  to  furnish  the 
supply  tends  to  raise  the  rate  of  interest.  This  in  turn 
tends  to  check  demand  and  thus  to  restrict  trade.  A  tax 
on  banking  is  a  tax  on  borrowing,  and  as  trade  is  now 
carried  on  by  means  of  credit,  such  a  tax  must  be  dif- 
fused throughout  the  industrial  world.  Were  there  no 
such  tax,  doubtless  many  banks  would  be  organized  in 


THE  ECONOMIC  METHOD  323 

places  where  they  do  not  now  exist,  to  the  great  advantage 
of  the  trade  of  those  places.  It  would  also  be  to  the  ad- 
vantage of  the  whole  country,  for  the  lack  of  banking 
facilities  compels  the  use  of  great  quantities  of  currency, 
to  supply  which  sometimes  causes  a  good  deal  of  embar- 
rassment. Were  all  taxes  taken  off  the  business  of  banking, 
all  other  business  would  be  benefited;  and  after  a  short 
time,  competition  would  bring  down  the  profits  of  bankers 
to  a  normal  level. 

Apart  from  legislative  restraints,  banking  is  not  the 
subject  of  monopoly,  and  even  chartered  banks  must  feel 
the  competition  of  other  money  lenders.  When  there  is 
but  one  bank  in  a  town,  it  may  be  able  to  obtain  some- 
what higher  rates  for  its  loans  than  it  would  if  there  were 
several,  but  this  advantage  is  not  very  great.  If  very 
high  rates  were  obtained,  competitors  would  soon  learn 
it,  and  endeavor  to  share  the  abnormal  gain,  and  borrowers 
would  go  away  to  get  their  paper  discounted.  It  is  true 
that  an  old  bank  with  much  capital  enjoys  a  kind  of 
monopoly.  Its  prestige,  or  good  will,  may  be  an  asset 
of  very  great  value.  But  it  seems  inequitable  to  lay  a 
special  tax  on  a  monopoly  of  this  kind,  which  is  the  result 
of  ability  of  a  high  order  applied  to  the  promotion  of 
trade.  The  successful  management,  which  gives  the  pres- 
tige, means  that  thousands,  perhaps  millions,  of  loans  have 
been  prudently  made,  and  that  as  many  depositors  have 
been  honorably  repaid.  The  enhanced  value  which  a 
property  so  managed  acquires  cannot  be  said  to  be  un- 
earned; even  if  the  men  who  created  the  value  have 
passed  away,  it  seems  for  the  public  interest  that  others 
should  be  encouraged  to  follow  their  policy.  So  far  as 
the  good  will  of  a  bank  appears  in  the  valuation  of  its 


324  METHODS  OF  TAXATION 

stock,  it  is  taxed  when  the  stock  is  taxed,  and  it  would 
be  difficult  to  devise  any  other  way  of  reaching  an  asset 
of  such  a  fleeting  and  perishable  nature. 

Were  a  scientific  system  of  taxing  banks  established, 
it  might  recommend  itself  as  a  fiscal  measure.  It  would 
not  require  self  assessment,  and  while  it  would  be  a  burden 
on  trade,  it  would  be  very  generally  diffused,  and  might 
perhaps  violate  no  principle  of  justice.  No  such  system 
now  exists,  and  the  methods  and  rates  of  assessment  vary 
greatly  in  different  states  and  localities.  As  is  shown  in 
the  appendix,  the  most  outrageous  inequality  has  prevailed 
in  assessing  the  banks  of  Chicago,  and  similar  inequality 
is  everywhere  to  be  found.  Nor  is  it  easy  to  avoid.  The 
assets  of  a  bank  are  constantly  changing,  and  it  is  difficult 
to  assign  them  a  precise  value.  Nor  does  this  value  meas- 
ure the  profits  of  the  bank.  The  simplest  plan  would  be 
to  tax  the  dividends  that  it  made,  and  attempt  no  other 
taxation  of  stockholders.  There  is,  unfortunately,  little 
probability  that  such  a  tax  would  commend  itself  to  our 
legislatures.  In  spite  of  the  obvious  usefulness  of  banks, 
they  are  a  favorite  object  of  denunciation  by  demagogues, 
and  much  ignorance  and  prejudice  have  been  displayed  in 
the  legislative  regulation  of  their  functions. 

Savings  banks  are  often  forbidden  to  engage  in  banking, 
and  where  this  restriction  prevails,  they  are  simply  invest- 
ing agencies.  As  they  are  not  carried  on  for  the  profit  of 
stockholders,  any  taxes  levied  on  them  fall  directly  on  their 
depositors.  To  some  extent  the  banks  may  shift  the  tax 
upon  borrowers,  by  demanding  higher  rates  of  interest; 
and  they  may  be  enabled  to  buy  securities  at  lower  prices. 
In  this  way  the  tax  would  be  generally  diffused ;  but,  owing 
to  the  character  of  the  depositors  in  these  banks,  they  would 


THE  ECONOMIC  METHOD  325 

probably  pay  a  large  part  of  it.  This  is  because  their 
opportunities  for  investment  are  limited;  many  of  them 
would  not  know  what  to  do  with  their  money  if  they  could 
not  put  it  in  the  savings  bank,  and  they  might  bear  a  heavy 
tax  rather  than  withdraw  it.  It  seems  oppressive  to  exact 
such  a  tax  from  persons  in  this  situation,  and  it  is  the 
policy  of  some  of  our  states  to  encourage  thrift  among  the 
poor  by  exempting  their  savings.  Complaint  is  heard  that 
rich  people  take  advantage  of  this  exemption.  But  were 
it  abolished  they  would  find  other  ways  of  investing  their 
money  so  as  to  escape  double  taxation.  As  with  taxes  on 
other  corporations,  the  cost  of  collection  is  small ;  and  the 
burden  is  equally  distributed.  It  is  not  on  fiscal  grounds 
that  the  tax  is  objectionable. 

Life  insurance  companies-  resemble  savings  banks  in 
many  respects.  They  are  properly  investing  companies, 
organized  for  the  benefit  of  those  who  wish  to  provide  for 
their  families ;  although  when  they  have  a  capital  stock,  it 
sometimes  becomes  very  valuable,  and  the  mutual  owner- 
ship plan  seems  more  consistent  with  the  purpose  of  such 
institutions.  As  the  holders  of  their  policies  are  not  of 
the  poorer  class,  these  companies  are  usually  taxed,  and 
sometimes  at  very  high  rates.  In  the  State  of  New  York 
the  tax  amounts  to  one-fourth  of  the  payments  to  bene- 
ficiaries. Such  a  tax  is  evidently  paid  by  the  policy 
holders,  and  it  tends  to  be  diffused,  as  in  the  case  of  the 
tax  on  savings  banks.  It  is  easily  collected,  but  of  ques- 
tionable wisdom.  Fire  insurance  companies  are  more 
commonly  organized  for  the  profit  of  their  stockholders; 
but,  as  already  explained,  the  burden  of  the  tax  upon  them 
falls  on  the  policy  holders,  and  thus  raises  the  cost  of  fire 
insurance.  As  the  practice  of  insuring  against  loss  by  fire 


326  METHODS  OF  TAXATION 

is  universal,  the  policy  of  making  it  more  expensive  is  open 
to  question.  Some  attempt  has  been  made  to  limit  the 
amount  of  business  done  by  life  insurance  companies,  on 
the  ground  that  the  great  funds  controlled  by  some  of 
them  constitute  a  kind  of  monopoly ;  and  they  are  forbid- 
den to  invest  in  certain  securities.  How  far  regulations  of 
this  nature  are  for  the  benefit  of  the  community  is  a  matter 
on  which  opinions  differ. 

Allusion  has  been  made  to  two  taxes  recently  imposed 
in  the  State  of  New  York,  one  a  tax  on  transfers  of  title  to 
shares  of  stock  in  corporations,  the  other  a  tax  on  mort- 
gages. The  former  tax  violates  every  principle  of  justice. 
It  is  levied  on  the  face  value  of  stock,  and  is  therefore 
grossly  unequal.  Two  stocks  may  have  the  same  face 
value,  but  one  of  them  may  sell  at  20,  the  other  at  200.  To 
transfer  one  of  them  will  involve  the  payment  of  a  tax 
ten  times  as  heavy  as  when  the  other  is  transferred.  When- 
ever the  stock  is  sold,  the  tax  is  repeated,  and  it  may  be 
levied  a  hundred  times  in  a  year  on  the  same  property. 
The  tax  requires  self-assessment,  and  it  is  a  misdemeanor 
to  evade  it.  Nevertheless  it  can  often  be,  and  it  often  is, 
evaded.  The  legislature  has  endeavored  to  prevent  evasion 
by  requiring  dealers  to  open  their  accounts  for  inspec- 
tion by  the  tax-gatherers,  but  the  courts  have  declared 
this  proceeding  unconstitutional.  Such  a  tax  puts  a  pre- 
mium on  dishonesty,  and  is  to  be  condemned  on  every 
ground.  It  no  doubt  brings  in  a  large  revenue,  and  it  is 
defended  as  a  tax  on  gambling.  But  to  tax  all  transfers 
of  title  because  some  transfers  are  made  by  speculators  is  a 
travesty  of  justice.  It  is  a  reversion  to  barbarism. 

The  tax  on  mortgages  stands  on  a  somewhat  different 
footing.  For  a  long  time  mortgages  were  nominally  taxed 


THE  ECONOMIC  METHOD  327 

at  their  face  value,  but  the  exemptions  were  numberless  and 
evasion  was  universal.  Finally,  as  a  compromise,  the  tax 
was  reduced  to  a  low  figure,  and  made  payable  when  the 
mortgage  is  recorded.  The  tax  is  equal  in  so  far  as  it  is 
proportioned  to  the  amount  of  the  mortgage,  but  unequal 
in  that  it  is  not  proportioned  to  the  time  for  which  the 
mortgage  runs.  It  is  unequal,  too,  because  it  falls  on  those 
who  have  occasion  to  borrow  on  the  security  of  their  land, 
and  not  on  those  having  no  such  need.  It  is  obviously  a  tax 
on  land,  because  it  renders  trading  in  land  more  expensive ; 
and  on  this  ground  the  mortgages  taken  by  companies 
formed  for  the  acquisition  of  homes  by  cooperation  are 
exempted.  But  the  rate  is  so  moderate  as  to  have  no  per- 
ceptible effect  on  land  values,  and  the  expense  of  collec- 
tion ought  to  be  extremely  small.  If  it  is  thought  desirable 
to  tax  transfers  of  title  to  land  at  all,  the  present  tax  is 
perhaps  as  satisfactory  as  any  that  could  be  devised,  and 
as  such  transfers  are  relatively  infrequent  the  occasional 
inequality  may  be  disregarded.  Under  our  system  of  title 
by  public  record,  little  inequality  through  evasion  of  the 
tax  can  arise. 

This  review  indicates  the  limitations  of  the  fiscal 
method.  On  the  one  hand  justice  forbids  the  resort  to  self- 
assessment,  and  on  this  account  both  the  general  property 
tax  and  the  income  tax  must  be  rejected.  License  taxes 
are  objectionable  because  they  are  unequal.  They  fall 
heaviest  on  men  of  small  capital,  and  few  of  them  produce 
revenue  enough  to  compensate  for  the  vexation  which  they 
cause.  The  great  taxes  on  the  production  of  spirits,  beer, 
and  tobacco,  seem  to  have  become  part  of  the  natural  order 
of  things,  although  many  persons  now  living  remember 
when  they  did  not  exist.  So  long  as  public  opinion  regards 


328  METHODS  OF  TAXATION 

them  as  sumptuary  taxes,  they  will  probably  be  retained. 
They  are  certainly  very  productive  of  revenue,  and  while 
they  offend  against  some  of  the  principles  of  the  fiscal 
method,  it  seems  hopeless  at  present  to  try  to  dispense  with 
them.  Some  of  the  progressive  taxes  can  be  collected  with 
moderate  expense ;  if  the  progressive  principle  is  admitted 
to  be  just,  not  much  objection  can  be  raised  on  fiscal 
grounds  to  high  taxes  on  large  legacies,  and  a  graduated 
tax  on  house  rents  has  very  exceptional  recommendations. 
"With  these  exceptions,  the  fiscal  method  rejects  all  attempts 
to  ascertain  the  wealth,  or  the  ability  to  bear  taxation,  of 
the  individual.  What  are  known  as  stamp  taxes  are  usually 
taxes  on  transfers  of  title,  and  are  almost  necessarily  un- 
equal. They  may  have  fiscal  advantages,  but  such  advan- 
tages are  not  sufficient  to  overcome  this  objection.  Taxes 
on  corporations  as  such  are  taxes  on  the  machinery  of  trade ; 
they  diminish  the  economic  gain  which  the  corporation  is 
created  to  secure,  and  seem  to  be  therefore  irrational  as 
well  as  burdensome.  Taxes  on  monopolies  are  in  most 
cases  repugnant  to  the  governmental  policy  which  creates 
and  favors  monopolies,  and  are  in  other  cases  of  uncertain 
fiscal  merit.  Public  opinion  certainly  does  not  demand 
that  the  monopoly  value  of  lands  held  by  individual  owners 
should  be  confiscated  by  the  legislature  through  special 
taxation.  Whether  it  is  fiscally  desirable,  if  practicable, 
to  expropriate  the  owners  of  this  value  when  represented 
in  public  service  corporations,  and  in  what  manner,  are 
questions  concerning  which  public  opinion  is  still  un- 
formed. In  general,  companies  engaged  in  trade,  in  bank- 
ing, in  insurance,  etc.,  are  subject  to  so  much  competition 
as  to  make  it  vain  to  attempt  to  tax  them  as  monopolies ; 
and,  while  there  are  apparently  fiscal  advantages  in  taxing 


THE  ECONOMIC  METHOD  329 

them,  the  burdens  of  the  community  may  be  thereby  even- 
tually increased  to  an  extent  that  will  neutralize  the  fiscal 
gain. 

It  thus  appears  that  a  number  of  taxes  may  comply  with 
the  chief  requirement  of  the  fiscal  method,  inexpensive- 
ness  of  collection ;  but  there  is  danger  of  a  fallacy  of  com- 
position. Taken  by  itself  every  one  of  these  taxes  may  be 
satisfactory,  but  taken  together  they  may  require  a  multi- 
plication of  taxing  officers,  and  a  needless  amount  of  book- 
keeping by  taxpayers.  If  it  should  appear  practicable  to 
obtain  the  required  revenue  by  means  of  a  few  of  these 
taxes,  or  even  by  a  single  tax,  the  gross  expense  of  collec- 
tion might  be  materially  reduced.  In  order  to  ascertain 
this,  we  need  to  consider  with  care  what  elements  make, 
up  the  cost  of  collection ;  and  as  this  cost  is  of  peculiar 
importance  in  the  case  of  that  large  class  of  taxes  known 
as  customs  duties,  it  will  be  convenient  to  examine  them 
at  the  same  time. 


CHAPTER  X 

THE  COST  OF  COLLECTING  TAXES 

THE  amount  of  a  tax  is  properly  the  amount  finally 
deducted  from  the  wealth  of  the  community,  including 
not  only  the  money  actually  paid  over  to  the  tax-gatherer, 
but  also  all  the  disbursements  of  the  taxpayer,  whether 
they  be  in  the  shape  of  the  payment  of  money,  or  loss  of 
time,  or  trouble  or  vexation  of  any  kind.  This  part  of  the 
cost  of  collecting  taxes  never  appears  in  the  reports  or 
statistical  tables  of  the  public  treasury,  nor  has  it  received 
very  much  attention  from  economists.  Adam  Smith,  with 
his  usual  comprehensiveness  of  treatment,  showed  its  im- 
portance; and  many  other  writers  have  pointed  out  that 
certain  taxes  may  take  out  of  the  pockets  of  the  people 
much  more  than  they  bring  in  to  the  treasury.  How  this 
comes  to  pass  has  been  partly  explained  under  the  head  of 
the  diffusion  of  taxes,  the  general  principle  being  that  a 
tax  falling  on  what  are  called  raw  materials  tends  to  in- 
crease by  more  than  its  amount  the  cost  of  finished  goods. 
This  element  of  cost  is  so  striking  as  perhaps  to  have 
caused  the  others  to  be  disregarded ;  and  their  nature  is 
such  as  to  make  it  very  difficult  to  estimate  their  amount 
accurately.  This  difficulty,  however,  should  not  be  al- 
lowed to  preclude  all  attempts  at  such  an  estimate. 

To  avoid  circumlocution,  we  shall  speak  of  the  disburse- 
ments of  the  government  in  obtaining  revenue  as  the  cost 
of  collecting,  and  the  disbursements  and  expenses  of  the 
taxpayers  as  the  cost  of  paying  taxes;  the  sum  of  these 


THE  COST  OF  COLLECTING  TAXES      331 

costs  expressing  the  total  cost  of  the  taxing  process.  The 
cost  of  collection  may  he  first  examined.  As  has  heen  said, 
the  government  reports  throw  no  light  on  the  cost  of  paying 
taxes,  and  unfortunately,  they  are  of  little  value  in  ascer- 
taining the  cost  of  collecting  them.  They  do  not  state  the 
cost  that  they  profess  to  state,  but  only  a  portion  of  it. 
As  a  part  of  its  machinery  of  collection,  the  general  gov- 
ernment has  spent  enormous  sums  in  constructing  public 
buildings,  post  offices,  custom  houses,  etc.,  all  of  which  are 
exempt  from  taxation.  Under  a  proper  system  of  book- 
keeping, these  disbursements  should  appear  in  a  capital 
account,  and  the  cost  of  maintenance,  including  a  proper 
allowance  for  local  taxes,  should  appear  as  an  operating 
expense.  ~No  such  accounts  are  exhibited  when  the  govern- 
ment reports  the  cost  of  collecting  its  revenue.  To  judge 
from  these  reports,  the  costly  structures  where  customs  are 
collected  have  no  existence,  and  of  course  cost  nothing  to 
maintain. 

When  the  government  rents  a  building  for  a  post  office, 
the  rent  appears  as  a  disbursement,  and  out  of  the  rent  the 
owner  pays  the  local  taxes.  When  it  builds  its  own  office, 
always  at  a  great,  and  usually  at  an  unnecessary  expense, 
the  charge  for  rent  disappears.  Apparently  the  government 
is  carrying  on  its  business  more  economically  than  before; 
really  the  expenses  have  increased  and  sometimes  very 
greatly  increased.  The  city  where  the  building  is  located 
is  poorer  through  the  loss  of  the  tax  formerly  paid,1  and 
the  whole  community  is  poorer  through  the  sinking  of 
a  part  of  its  capital  on  which  no  interest  is  charged,  and 
through  an  increase  in  the  cost  of  maintaining  the  public 

1  Although  the  buildings  occupied  by  the  British  government  are 
not  rated,  the  government  assumes  some  of  the  expense  of  the  district 
where  the  buildings  are  situated,  by  contributing  to  the  rates. 


332  METHODS  OF  TAXATION 

service.  The  post  office  always  reports  a  large  deficiency. 
If  its  accounts  were  kept  as  those  of  every  sound  corpora- 
tion should  be  kept,  this  deficiency  would  be  very  greatly 
increased. 

The  reports  of  the  cost  of  collecting  customs  duties  are 
equally  incorrect.  They  include  the  salaries  and  wages 
of  employees  and  little  else.  They  do  not  include  expendi- 
tures for  consulships,  for  revenue  cutters,  for  fuel,  lights, 
water,  furniture,  janitors,  etc.,  for  buildings  owned  by 
the  government,1  nor  any  interest  charge,  nor  the  cost  of 
new  buildings.  They  include  no  disbursements  at  Wash- 
ington, although  the  expenses  of  the  treasury  there  are 
admitted  to  be  some  four  millions,  and  would  be  twice 
that,  if  account  were  kept  of  capital  there  expended.  Ac- 
cording to  the  statement  of  the  government,  its  cost  of 
collection  is  from  three  to  five  per  cent  of  the  duties 
received;  the  expense  of  collection  not  increasing  in  pro- 
portion to  the  volume  of  imports.  It  is  perhaps  not  un- 
reasonable to  suppose  that  the  true  cost  is  double  what  is 
stated.  To  determine  it  accurately  would  require  an  ex- 
amination of  a  large  part  of  the  accounts  of  the  government 
for  many  years  past;  but  the  size  of  the  annual  appro- 
priations for  public  buildings  is  notorious,  and  it  is  easy  to 
calculate  that  the  interest  charge  for  such  investments 
would  reach  an  enormous  figure.  Similar  criticisms  apply 
to  the  statement  of  the  cost  of  collecting  the  internal  rev- 
enue. This  statement  includes  almost  nothing  except  dis- 
bursements for  salaries  and  wages.  The  expenses  of  this 
department  are  much  less  than  in  that  of  the  customs ;  but 
they  are  much  larger  than  they  are  admitted  to  be. 

1  The  appropriations  for  wages  and  salaries  for  this  account  run  up 
to  nearly  $2,000,000. 


THE  COST  OF  COLLECTING  TAXES      333 

The  cost  of  paying  taxes  is  illustrated  in  the  process  of 
meeting  the  requirements  of  the  government  when  goods 
are  imported  from  foreign  lands.  The  importer  is  put  to 
some  expense  before  the  transportation  of  his  goods  begins, 
as  the  preparation  of  invoices  and  the  determination  of 
market  values  is  not  a  simple  matter.  When  the  goods 
arrive,  only  experts  can  comply  with  the  necessary  for- 
malities, and  a  large  number  of  customs  brokers  are  con- 
stantly engaged  in  assisting  importers  in  clearing  their 
goods,  a  service  which  is  by  no  means  gratuitous.1  It  might 
be  supposed  that  when  a  tariff  has  been  in  force  for  a  dozen 
years  it  must  be  thoroughly  understood.  As  a  matter  of 
fact  the  disputes  over  duties  seem  to  be  endless,  and  they 
occupy  the  time  not  only  of  the  customs  officers,  but  of  the 
lawyers  and  experts  paid  by  the  importers.  During  the 
fiscal  year  of  1907  the  Board  of  Appraisers  settled  protests 
in  87,631  cases.  It  would  probably  be  a  gross  under- 
estimate to  suppose  the  cost  of  each  case  to  average  only 
ten  dollars;  but  even  then  the  total  cost  would  be  nearly 
a  million,  and  at  a  hundred  dollars  a  case  it  would  be 
nearly  as  much  as  what  the  government  declares  to  be 
the  cost  of  the  customs  service.  In  every  case,  samples 
must  be  taken,  packages  opened,  fees  paid,  errors  atoned 
for.  Duties  paid  by  mistake  on  a  larger  quantity  of  goods 
than  is  actually  imported  cannot  be  recovered.  There  is 
no  appeal  to  the  collector,  for  such  appeals  lie  only  in  the 
case  of  imported  goods,  and  the  goods  in  question  were  not 

1  Every  railway  car  entering  this  country  requires  a  certain  paper 
manifest,  the  cost  of  which  is  incalculably  small.  But  the  collectors 
of  customs  sell  these  forms  to  the  railways  at  ten  cents  a  piece.  In 
some  districts  the  collectors  are  supposed  to  pocket  as  much  as 
$30,000  a  year  in  this  way.  This  is  not  a  cost  of  collecting  taxes; 
it  is  a  cost  of  paying  them. 


334  METHODS  OF  TAXATION 

imported.  Nor  is  anything  gained  by  appealing  to  the 
Department,  for  when  the  money  has  been  covered  into 
the  treasury  it  will  not  be  refunded.  And  a  very  little 
delay  in  protesting  or  applying  for  re-appraisement  is  fatal 
to  the  proceeding. 

In  view  of  the  hundreds  and  even  thousands  of  classes 
of  goods  recognized  by  the  tariff  and  the  commentaries 
upon  it,  it  might  seem  that  no  doubt  could  exist  as  to  the 
proper  classification  of  any  article  of  merchandise.  There 
could  be  no  greater  mistake.  The  disputes  over  classifica- 
tion seem  rather  to  increase  than  diminish,  and  there  is 
no  prospect  of  their  terminating.  This  is  partly  because 
new  things  are  constantly  invented,  and  new  combinations 
of  old  things  made.  In  order  to  meet  the  demands  of  the 
protective  system,  all  sorts  of  materials  must  be  taxed  not 
only  in  their  most  simple  forms,  but  also  in  their  com- 
posite forms.  There  must  be  a  tax  on  jute,  on  cotton,  on 
wool,  on  silk,  on  mohair,  etc.  But  a  fabric  may  be  woven 
of  all  these  substances,  and  of  varying  proportions  of  them, 
and  how  shall  it  be  taxed?  In  fact  the  number  of  new 
fabrics  is  constantly  increasing,  and  novelties  appear  in 
every  department  of  manufacture. 

Sugar  may  seem  a  simple  substance ;  but  there  are  many 
different  kinds  of  sirups  and  sugars,  having  different  quali- 
ties and  values,  and  they  are  subjected  to  many  different 
processes.  To  determine  how  imported  sugar  should  be 
taxed,  not  long  since  caused  such  violent  disputes  in  Con- 
gress as  nearly  wrecked  a  tariff  bill,  and  came  near  wreck- 
ing an  administration.  To  lay  a  tax  on  sugar  is  to  disturb 
a  hundred  industries,  situated  all  over  the  world.  It  may 
seem  surprising  that  we  eat  jam  made  in  Dundee,  where 
neither  fruit  nor  sugar  are  indigenous.  We  do  so  because 


THE  COST  OF  COLLECTING  TAXES      335 

the  governments  of  Europe  adopted  a  policy  of  taxing  their 
subjects  which  had  the  result  of  supplying  sugar  to  the 
Scottish  manufacturers  at  less  than  cost.  We  may  perhaps 
cease  to  eat  this  jam,  for  now  the  government  of  England 
has  adopted  the  policy  of  taxing  its  subjects  on  the  sugar 
that  they  import,  in  order  to  benefit  the  West  Indian 
planters.3  Nothing  is  more  misleading  than  to  apply 
a  class  name  to  a  number  of  things  that  have  important 
differences.  Beet  sugar  differs  from  cane  sugar,  and  the 
sugar  of  Java  differs  much  from  that  of  Cuba.  The  sugar 
at  the  top  of  a  hogshead  differs  in  quality  from  that  at  the 
bottom,  and  under  most  tariffs  would  be  dutiable  at  a  differ- 
ent rate.  The  government  is  now  suing  the  American 
Sugar  Refining  Company  on  the  ground  that  for  many 
years  it  has  not  paid  -the  proper  duties  on  its  imports. 
When  every  bag  and  hogshead  of  sugar  has  to  be  weighed, 
and  should  be  scientifically  sampled,  it  would  not  be  sur- 
prising if  in  testing  so  many  millions  of  packages  there 
should  be  a  vast  number  of  errors. 

The  difficulty  of  determining  the  cost  of  paying  taxes 
on  sugar  is  increased  by  the  policy  of  protection.  A  num- 
ber of  years  ago  the  planters  of  Hawaii  succeeded  in  hav- 
ing their  product  exempted  from  duty,  and  this  product 
now  amounts  to  over  700  million  pounds.  The  planters 
of  Porto  Rico  more  recently  obtained  this  favor,  and  their 
product  has  risen  from  an  insignificant  quantity  to  over 
400  million  pounds.  The  planters  of  the  Philippines  have 
been  less  favored,  paying  three-fourths  of  the  full  duty, 
while  those  of  Cuba  pay  four-fifths  of  it.  The  planters  of 
Louisiana  and  the  domestic  producers  of  beet  sugar  of 

1  The  customs  officers  even  claim  that  certain  leathers  shall  pay  a 
duty  on  the  sugar  that  is  used  in  treating  them. 


336  METHODS  OF  TAXATION 

course  pay  no  duty.  Out  of  a  total  consumption  of  about 
6,400  million  pounds,  some  1,130  million  pounds  pay  the 
full  duty,  and  about  2,850  million  pounds  pay  a  part  of 
it.  The  duties  amount  to  some  $52,000,000,  and  the 
bounties  in  the  shape  of  exemption  and  reduction  are  prob- 
ably not  much  less.  The  duties  themselves  vary  from  less 
than  a  cent  a  pound  on  inferior  sugars  to  nearly  two  cents 
on  the  highest  grades.  The  greater  part  of  the  imported 
sugars  are  supposed  to  pay  a  duty  of  about  one  cent  and 
two-thirds  a  pound.  Probably  the  tropical  countries  could 
produce  all  the  sugar  consumed  here  for  two  cents  a  pound. 
The  cost  of  refining  is  a  notoriously  litigated  subject.  It 
may  be  one-eighth,  or  one-fourth,  or  possibly  one-half  a 
cent  a  pound.  Consumers,  however,  pay  some  six  cents 
a  pound  for  their  sugar;  which,  on  a  moderate  estimate, 
is  perhaps  nearly  twice  what  they  would  pay  were  all 
duties  abolished,  and  is  certainly  one-half  more.  They 
pay,  to  the  planters  and  the  government  together  perhaps 
$100,000,000 ;  but  what  part  of  this  is  due  to  protection 
and  what  part  to  taxation  proper  it  is  impossible  to  deter- 
mine. In  this  discussion  we  have  assumed  the  policy  of 
protection  to  be  established;  but  granting  all  that  is 
claimed  for  it,  it  can  hardly  be  doubted  that  the  cost  of 
paying  taxes  on  sugar  is  more  than  the  amount  of  the 
taxes  themselves.  The  cost  of  collecting  these  taxes  there- 
fore must  be  far  less  than  the  cost  of  paying  them. 

Most  people  would  perhaps  regard  wheat  as  a  simple 
substance.  In  fact  there  are  many  species  of  wheat,  and 
many  grades  of  the  same  species.  There  are  spring  wheats 
and  winter  wheats,  and  the  latter  are  grown  in  many  widely 
separated  regions,  under  different  conditions,  and  the  same 
grade  may  vary  much  in  quality  according  as  it  is  shipped 


THE  COST  OF  COLLECTING  TAXES      337 

from  Galveston  or  from  New  York.  If  there  are  such 
differences  in  the  case  of  grain,  they  must  obviously  be 
much  greater  in  the  case  of  manufactured  goods.  It  is 
impossible  to  lay  specific  duties  upon  them  without  the 
grossest  inequality.  To  do  so  would  often  be  to  prohibit 
the  importation  of  the  cheaper  grades  of  a  commodity. 
Hence  it  is  necessary  to  resort  to  ad  valorem  duties,  under 
which  all  the  evils  of  self-assessment  arise.  In  order  to 
check  undervaluation  the  government  employs  spies 
abroad,  and  rewards  inspectors  with  a  part  of  the  moneys 
which  their  zeal,  so  stimulated,  may  justly  or  unjustly 
obtain  as  penalties.  The  whole  system  reeks  with  inequal- 
ity and  fraud.  It  has  all  the  evils  of  the  taxes  on  intan- 
gible personalty,  and  produces  the  same  results  on  the 
morals  of  merchants.  ,The  methods  of  undervaluation,  to 
say  nothing  of  actual  smuggling,  are  infinite  in  number, 
and  it  is  notorious  that  reputable  importers  in  certain  lines 
of  trade  have  been  driven  out  of  business  by  unscrupulous 
competitors.1 

Moreover,  in  spite  of  the  constitutional  provision  for 
uniform  duties,  the  cost  of  paying  taxes  varies  much  at 
different  ports  of  entry.  At  Boston,  the  importer  must 
claim  his  goods  and  pay  the  duties  within  two  days  of  the 
vessel's  discharge,  failing  which  the  goods  are  sent  to  a 

1  Cobden,  speaking  in  Parliament  in  1853,  said  he  remembered  being 
in  the  Chamber  of  Commerce  in  Manchester  when  a  deputation  from  the 
dealers  in  tobacco  and  snuff  came  in  to  complain  of  adulteration  caused 
by  high  taxes.  "The  gentlemen  who  were  the  largest  dealers  and  man- 
ufacturers said  to  us  most  frankly,  after  exposing  all  the  different  arti- 
cles with  which  tobacco  was  colored  and  adulterated,  such  as  the  beard 
from  malt,  peat  moss,  and  things  of  that  kind,  'There  is  not  a  man  in 
this  neighborhood  who  carries  on  the  tobacco  and  snuff  trade  without 
illegal  adulteration  except  Mr.  Read/  a  gentleman  who  was  then  pres- 
ent, but  who  has  since  left  the  trade  and  who  although  not  less  than  forty 
years  of  age,  went  to  Cambridge  and  is  now  in  holy  orders." 

22 


338  METHODS  OF  TAXATION 

bonded  warehouse,  at  a  cost  of  fifty  cents  a  package  for  the 
first  month,  and  twenty-five  cents  thereafter.  The  charge 
is  the  same  for  a  keg  of  fish  worth  five  dollars,  or  an  auto- 
mobile worth  five  thousand.  Under  this  general  order 
system  at  Boston,  goods  that  would  be  stored  elsewhere  for 
five  cents  a  month  pay  ten  times  that  amount  to  the  gov- 
ernment, or  to  a  favored  contractor,  while  in  New  York, 
where  the  charge  is  now  by  weight,  the  burden  is  much 
lighter.  The  truth  is  that  it  is  impossible  to  tax  merchan- 
dise with  any  approach  to  justice,  either  by  local  assess- 
ment or  by  customs  duties.  Specific  duties  necessarily  dis- 
criminate against  the  cheaper  grades  of  any  commodity; 
ad  valorem  duties  necessarily  encourage  dishonesty.  The 
customs  were  established  in  barbarous  times,  and  are  a 
relic  of  barbarism.  Unfortunately,  they  are  intimately 
connected  with  the  excise.  Spirits  and  tobacco  cannot  be 
taxed  for  inland  revenue  unless  taxed  when  imported ;  and 
if  a  single  import  is  taxed,  all  the  other  imports,  and  even 
travelers'  baggage,  must  be  inspected  to  prevent  smuggling. 
The  English  duties  are  the  most  scientific  of  any,  but 
owing  to  the  high  rates  imposed  on  spirits  and  tobacco, 
these  articles  are  often  concealed  among  other  goods,  and 
the  cost  of  collecting  a  few  duties  may  thus  be  not  much 
less  than  if  there  were  many ;  although  the  cost  of  paying 
duties  is  much  diminished. 

On  such  a  subject  as  this,  conclusions  must  be  largely 
conjectural ;  but  the  evidence  seems  sufficient  to  prove  that 
the  cost  of  collecting  duties  may  be  as  much  as  ten  per 
cent  of  the  amount  collected.  The  cost  of  paying  them, 
exclusive  of  the  enhanced  price  to  consumers,  may  be  as 
much  more.'  We  can  form  some  idea  of  the  extent  to  which 
price  may  be  enhanced  from  the  figures  concerning  sugar ; 


THE  COST  OF  COLLECTING  TAXES      339 

we  know  that  it  can  be  bought  abroad,  raw,  for  a  little 
more  than  two  cents  a  pound,  and  that  our  people  pay 
about  six  cents  for  it  when  refined.  We  know,  too,  that  this 
tax  is  relatively  much  more  burdensome  to  the  poor  than 
to  the  rich,  and  it  must  require  great  faith  in  the  doctrine 
of  protection  to  make  such  a  tax  seem  desirable.  But  such 
faith  unquestionably  prevails,  and  on  this  account  it  is 
not  worth  while  to  quote  the  elaborate  computations  of  such 
writers  as  David  A.  Wells,  Thomas  G.  Shearman,  and  Ed- 
ward Atkinson.  As  estimated  by  them,  the  enhanced 
prices  caused  by  our  customs  duties  amount  to  far  more 
than  the  duties  themselves;  but  the  subject  is  too  contro- 
versial to  be  here  considered.  Nevertheless  the  most  zeal- 
ous believer  in  protective  duties  cannot  deny  that  they 
enhance  prices;  for  that  is  their  avowed  purpose.  And, 
whether  imposed  for  protection  or  for  revenue,  when  they 
fall  on  materials  that  are  subjected  to  many  processes  after 
importation,  or  that  are  instruments  of  production,  they 
must  often  greatly  increase  the  price  paid  by  the  final  con- 
sumer. Some  sugar  is  used  in  certain  processes  of  manu- 
facture, and  as  an  instrument  of  production ;  but  the  great 
bulk  of  it,  when  refined,  passes  directly  into  consumption. 
We  know  how  greatly  the  price  of  sugar  is  nevertheless 
enhanced,  and  we  may  properly  infer  that  the  prices  of 
goods  manufactured  from  imported  materials,  especially 
when  imported  machinery  is  used,  must  be  enhanced  in  a 
greater  degree. 

This  examination  proves  that  the  cost  of  paying  and 
collecting  taxes,  although  commonly  neglected,  is  a  factor 
of  transcendent  importance  in  the  problem  of  taxation. 
The  aggregate  injustice  caused  by  making  the  process  need- 
lessly expensive  is  enormous.  Many  taxes  must  be  con- 


340  METHODS  OF  TAXATION 

demned  because  they  offend  against  justice  in  other  ways ; 
but  more  are  to  be  rejected  because  they  offend  in  this 
way.  We  are  thus  brought  face  to  face  with  the  question 
whether  there  is  any  tax,  or  any  system  of  taxes,  that 
offends  in  neither  way.  Such  taxation  must  not  depend  on 
self-assessment,  and  it  must  fall  only  on  property  that  is 
visible  and  tangible.  It  must  not  be  laid  on  movable  or 
evanescent  property,  but  only  on  what  is  durable  and  open 
to  the  inspection  of  the  public  as  well  as  of  the  assessor. 
The  value  of  the  property  too,  should  be  notorious,  or 
easily  ascertainable,  not  only  that  few  assessors  may  be 
paid,  but  also  that  their  judgments  may  be  open  to 
correction.  While  it  is  desirable  that  the  property  taxed 
should  be  in  universal  use,  in  order  that  the  tax  may  seem 
proportionate,  it  will  also  be  advantageous  if  it  has  some 
monopoly  value,  in  order  not  to  offend  against  the  pro- 
gressive principle.  And,  finally,  the  payment  of  the  tax 
should  be  so  simple  a  matter  as  not  to  compel  the  taxpayer 
to  employ  expert  assistance,  or  to  waste  time  in  complying 
with  vexatious  formalities. 

A  tax  on  real  property,  proportioned  to  the  rental  value 
of  every  separate  parcel,  seems  to  comply  very  perfectly 
with  all  these  requirements.  Land  is  permanent  and  im- 
movable. It  cannot  be  concealed,  and  its  value  can  be 
ascertained  by  inspection.  The  owner  needs  not  be  com- 
pelled to  disclose  it,  for  others  can  estimate  it  nearly  as  well 
as  he.  Every  one  owns  or  hires  some  land.  He  uses  it  for 
the  extraction  of  materials,  for  the  production  of  food,  for 
making  and  storing  goods,  or  for  his  own  shelter.  If  the 
ore  or  the  grain  obtained  from  a  piece  of  ground  is  valu- 
able, that  value  is  reflected  in  the  price  of  the  land.  If  the 
goods  kept  on  the  land  are  of  great  value,  the  value  of  the 


THE  COST  OF  COLLECTING  TAXES      341 

land  is  enhanced.  If  its  possession  enables  the  occupant 
to  carry  on  a  very  profitable  business,  this  profit  will  com- 
pel him  to  pay  a  high  rent.  The  poor  man  must  content 
himself  with  cheap  shelter,  erected  on  cheap  land.  The 
rich  man  will  indulge  in  costly  shelter,  and  his  rent  will 
correspond  with  his  circumstances.  The  expense  of  collect- 
ing the  tax  on  real  property  is  very  small;  it  is  caused 
chiefly  by  the  labor  of  assessment.  The  expense  of  paying 
the  tax,  provided  the  assessment  has  been  properly  made, 
is  insignificant;  it  may  amount  to  no  more  than  the  cost 
of  a  few  postage  stamps,  expended  once  a  year. 

Many  tracts  of  land  produce  no  rent,  and  if  any  taxes 
are  laid  on  such  land,  they  must  be  merely  nominal.  Most 
parcels  of  land  have  a  value  due  either  to  the  labor  of  the 
owner  and  of  those  from  whom  he  derives  title,  or  to  the 
growth  of  population,  the  existence  of  valuable  minerals  or 
properties  of  soil,  the  construction  of  roads,  etc.  This 
latter  value  is  distinguished  as  unearned,  or  public  value. 
In  theory,  it  would  be  most  just  to  confine  taxation  to  this 
value.  Practically,  as  has  been  explained  above,  this  would 
not  be  true,  because  it  would  involve  a  revolutionary 
change  in  the  constitution  of  the  industrial  world,  and 
because  it  would  be  a  task  of  enormous  difficulty  to  dis- 
tinguish earned  from  unearned  value.  No  doubt  this 
attempt  is  made  under  some  of  our  systems  of  assessment. 
The  assessors  assign  a  certain  value  to  the  land,  and  a 
certain  value  to  the  improvements  thereon.1  It  often  hap- 
pens that  men  buy  land  on  which  buildings  are  standing, 
intending  to  destroy  and  replace  them.  In  such  cases, 


1  Of  course,  it  is  easy  enough  to  do  this.  As  has  been  said  in  Eng- 
land, a  professional  valuator  will  put  a  value  on  anything,  if  he  is  paid 
for  it.  The  scientific  value  of  these  valuations  is  questionable. 


342  METHODS  OF  TAXATION 

perhaps,  a  definite  value  can  be  assigned  to  the  land ;  but 
this  is  because  the  value  of  the  existing  improvements  has 
become  relatively  so  small  as  to  be  negligible.  The  same 
thing  takes  place  when  agricultural  land  becomes  available 
for  building  sites.  The  labor  expended  in  fertilizing  the 
soil  is  disregarded,  being  swallowed  up  in  the  new  value. 
Nevertheless,  we  cannot  ignore  the  fact  that  this  labor  has 
been  expended,  and  has  become  embodied  in  the  land ;  the 
new  value  would  be  greater  did  it  not  involve  the  destruc- 
tion of  the  old.  On  the  whole,  it  seems  that  justice  will  be 
better  attained  by  continuing  the  existing  system  of  taxing 
every  parcel  of  real  estate  as  a  unit,  basing  the  assessment 
on  its  rental  value. 

This  conclusion  is  strengthened  when  we  reflect  that 
such  a  tax  falls  progressively  on  the  unearned,  or  public 
value.  As  a  rule,  costly  buildings  are  erected  only  on 
costly  land.  In  some  parts  of  New  York  City  it  would 
perhaps  be  impracticable  to  construct  a  building  that 
should  have  the  value  of  its  site.  Hence  a  tax  on  the  land 
and  building  together  falls  in  great  part  on  the  public 
value  of  the  land ;  it  is  levied  more  on  the  monopoly  value 
than  on  the  earned  value.  It  is  admitted  that  a  tax  on  rent 
proper  cannot  be  shifted ;  it  must  be  paid  by  the  landlord. 
To  a  certain  extent,  therefore,  the  existing  tax  on  real 
estate  falls  on  landlords  as  a  class,  and  the  obstacles  in  the 
way  of  going  further  in  this  direction  are  very  great.  It 
would  not  be  easy  to  overcome  them  in  the  cities.  In  the 
country  it  might  be  impossible. 

In  so  far  as  this  tax  falls  on  improvements,  as  we  have 
seen,  it  tends  to  be  diffused ;  but  it  is  diffused  throughout 
the  community.  If  buildings  are  heavily  taxed,  building 
will  be  expensive;  but  it  will  be  proportioned  to  the  de- 


THE  COST  OF  COLLECTING  TAXES      343 

mand.  Men  must  have  shops  and  houses,  and  they  must 
therefore  pay  such  a  price  for  them  as  will  cause  them  to 
be  built.  And,  as  has  been  observed,  where  buildings  cost 
more,  any  diminution  in  the  demand  for  them  tends  to 
diminish  the  value  of  land.  In  some  degree,  therefore,  a 
tax  on  buildings  falls  on  rent  proper.  To  attempt  to  throw 
the  whole  burden  on  rent  would  certainly  increase  very 
much  the  cost  of  collecting  the  tax.  Rent  represents  a  dif- 
ferential advantage,  and  to  assess  such  advantages  with 
accuracy  would  require  a  very  high  order  of  ability  and 
integrity  in  the  officers  charged  with  that  duty.  Their 
task  is  already  very  difficult,  and  their  assessments  are  to 
a  considerable  extent  conjectural.  The  inequalities  now 
prevailing  cause  many  protests;  were  they  increased,  the 
injustice  might  become  serious. 

Not  many  persons,  perhaps,  are  aware  how  small  is  the 
cost  of  collecting  this  tax.  The  assessor  of  the  City  of 
Glasgow  reports  the  cost  of  valuing  real  property  in  that 
city  at  only  £2,000  a  year.  All  premises  are  surveyed 
annually,  from  door  to  door,  the  names  of  owners  and  occu- 
pants taken,  and  the  rent  paid,  when  the  premises  are  let. 
At  the  same  time  schedules  are  issued  to  all  owners,  requir- 
ing them  to  give  the  names  of  their  tenants  and  the  rents 
paid.  These  schedules  are  compared  with  and  corrected 
by  the  results  of  the  survey.  The  rental  value  of  premises 
occupied  by  the  owner  is  usually  ascertained  by  compari- 
son with  similar  rented  premises.  After  the  valuation 
roll  has  been  made  up,  every  owner  or  occupier  is  served 
with  a  notice  of  his  assessment,  the  number  being  about 
180,000.  Appeal  lies  to  the  surveyor,  and  from  him  to 
the  town  council,  and  finally  to  two  judges  of  the  Court  of 
Session.  In  the  year  for  which  this  report  was  made,  there 


344  METHODS  OF  TAXATION 

were  no  appeals  to  this  Court;  those  to  the  town  council 
are  usually  from  80  to  100.  This  valuation  roll  is  always 
accepted  without  question  by  the  Board  of  Inland  Revenue 
in  levying  the  income  tax.  The  permanent  staff  of  the 
assessors'  office  is  only  34,  but  at  times  the  number  rises  to 
100.  The  small  cost  of  valuation  is  partly  explained  by 
the  fact  that  this  staff  performs  many  other  duties,  the 
cost  of  which  is  not  a  part  of  the  expense  of  assessment. 

The  cost  of  valuation  in  London  and  the  Metropolitan 
district  is,  partly  because  rates  are  levied  by  both  County 
and  Parochial  authorities,  materially  larger,  being  esti- 
mated at  from  £25,000  to  £40,000.  As  the  amount  of 
taxes  collected  in  the  year  when  this  estimate  was  made 
was  about  £12,000,000,  the  cost  was  moderate  enough.  It 
may  cause  surprise  to  learn  that  this  cost  is  quite  mod- 
erate in  the  City  of  ISTew  York.  The  department  of  taxes 
and  assessments  in  that  city  is  carried  on  for  a  little  over 
$400,000.  The  total  valuation  of  the  land  in  1907  was 
$6,240,000,000  and  the  number  of  parcels  assessed  was 
over  483,000,  making  the  cost  per  parcel  little  more  than 
80  cents.  This  department  assesses  personal  property 
also,  a  process  that  involves  much  labor.  Were  this  charge 
deducted,  it  would  considerably  reduce  the  cost  of  assess- 
ing the  land.  In  the  City  of  Philadelphia  the  number 
of  parcels  assessed  is  350,000,  the  cost  of  the  Tax  De- 
partment being  about  $187,000.  In  Baltimore  this  cost 
is  reported  to  be  $33,800;  the  number  of  parcels  being 
120,000. 

It  is  true  that  these  figures  require  to  be  raised.  They 
apparently  include  no  charge  for  office  rent  and  several 
other  expenses,  and  it  is  probable  that  they  do  not  include 
a  proper  charge  for  receiving  and  apportioning  the  pro- 


THE  COST  OF  COLLECTING  TAXES      345 

ceeds  of  taxation,  or  for  the  expenses  of  litigation.  But 
even  if  the  figures  were  doubled,  the  result  would  com- 
pare very  favorably  with  the  cost  of  collecting  customs 
duties.  That  cost  may  well  be  ten  per  cent,  while  the 
cost  of  collecting  nearly  one  hundred  million  dollars  from 
the  owners  of  real  estate  in  the  City  of  New  York,  espe- 
cially if  we  deduct  the  expense  of  the  tax  on  personalty, 
can  hardly  be  so  much  as  one  per  cent.  Nor  is  the  cost 
of  paying  this  tax  at  all  burdensome.  There  are  com- 
paratively few  disputes  concerning  assessments,  and  while 
the  expense  of  litigation  is  considerable,  it  is  probably 
much  less  than  in  the  case  of  customs  duties. 

It  cannot  be  denied  that  the  part  of  the  tax  on  real 
estate  that  falls  on  improvements,  such  as  factories,  shops, 
stations,  etc.,  is  a  tax  on  the  instruments  of  production, 
and  thus  increases  the  cost  of  products  to  the  consumer. 
This  fact  constitutes  a  strong  argument  for  exempting 
improvements,  and  confining  the  tax  to  rent.  The  ad- 
vantage, however,  is  probably  more  theoretical  than  prac- 
tical. The  cost  of  distinguishing  the  different  elements 
of  value,  and  that  of  settling  the  disputes  that  the  at- 
tempt to  distinguish  them  would  occasion,  would  perhaps 
more  than  equal  the  expected  gain.  In  spite  of  the  reason- 
ings of  economists,  the  opinions  of  experts,  the  reports 
of  numerous  commissions,  and  the  complaints  of  thousands 
of  outraged  citizens,  it  seems  to  be  almost  impossible  to 
induce  legislators  to  abolish  taxes  on  intangible  personalty. 
The  popular  conviction  is  very  strong  that  it  is  unjust 
to  exempt  the  property  of  a  rich  man  from  taxation,  no 
matter  what  the  nature  of  his  property  may  be.  It  would 
probably  be  equally  strong  as  to  the  injustice  of  exempt- 
ing the  shop  of  a  rich  merchant,  or  the  factory  of  a  large 


346  METHODS  OF  TAXATION 

firm  or  corporation.  The  community  would  no  doubt  gain 
through  such  exemption,  as  it  gains  through  every  de- 
crease in  cost  of  production;  but  at  least  it  may  be  said 
that  the  loss  from  taxation  of  this  kind  is  distributed 
equitably.  What  the  actual  loss  may  be  seems  altogether 
indeterminable.  That  it  is  less  than  might  be  supposed, 
may  perhaps  be  inferred  from  the  experience  of  numerous 
concerns  whose  property  has  been  exempted  from  taxa- 
tion for  a  term  of  years,  under  the  statutes  of  some  of 
our  states.  The  prosperity  of  these  concerns  has  perhaps 
seldom  been  so  great  as  to  prove  that  this  exemption  has 
been  very  advantageous,  and  if  it  has  not  been  of  great 
advantage  to  them,  it  cannot  have  been  to  the  community. 
And,  it  may  be  repeated,  if  a  factory  is  to  be  taxed,  those 
who  propose  to  build  it  cannot  pay  so  much  for  the  rent 
of  a  site  as  they  otherwise  could,  so  that  a  part  of  the 
tax  may  be  thrown  back  on  the  landlords. 

In  his  classical  report  on  the  reform  of  taxation  in  the 
State  of  New  York,  rendered  in  1871,  Mr.  Wells  pro- 
posed to  tax  personal  property  employed  in  trade.  He 
was  well  aware  of  -the  strength  of  the  prejudice  against 
exempting  any  form  of  property  from  taxation,  and  his 
suggestion  was  in  the  nature  of  a  compromise.  It  was 
based  on  the  principle  that  the  rental  value  of  buildings 
is  a  sign  of  the  value  of  the  personal  property  of  the 
occupants,  and  was  in  the  form  of  an  alternative.  Either 
the  land  might  be  taxed  separately  at  one-half  its  market 
value,  and  the  building  at  its  full  value  as  shown  by  its 
rent;  or  the  land  and  building  might  be  taxed  jointly  at 
their  market  value,  while  the  occupant  should  also  be 
taxed,  as  the  putative  owner  of  personal  property  to  the 
amount  of  three  times  the  rental  value  of  the  premises. 


THE  COST  OF  COLLECTING  TAXES      347 

At  the  time  of  this  report,  real  estate  was  commonly  as- 
sessed at  not  more  than  half  its  value,  and  it  was  deemed 
expedient  to  recognize  the  practice.  The  assumption  that 
the  occupant  of  a  building  owns  personalty  worth  three 
times  the  rent  that  he  pays,  is  arbitrary.  It  may  be  true 
on  the  average  of  men  engaged  in  trade,  so  far  as  their 
factories  and  shops  are  concerned;  but  it  could  be  true 
of  the  occupants  of  dwellings  only  if  their  incomes  were 
reckoned  as  property.  No  doubt,  with  such  a  system  of 
taxation,  more  revenue  would  have  been  derived  from 
personal  property  than  under  the  general  property  tax, 
and  a  great  deal  of  injustice  would  have  been  corrected. 
Nevertheless  it  is  economically  unwise  to  tax  capital  em- 
ployed in  production,  as  the  consumers  of  final  products 
may  have  to  pay  more  than  the  tax  in  enhanced  prices; 
and  for  the  reasons  about  to  be  stated,  the  desired  end 
can  be  obtained  through  a  measure  based  on  a  distinction 
of  really  fundamental  importance. 

For  dwelling-houses  are  not  to  be  classed  with  other 
buildings.  The  distinction  may  seem  unreasonable,  but 
it  exists,  and  it  would  cause  great  confusion  to  disregard 
it  To  a  great  extent  it  is  certainly  true  that  a  man 
thinks  of  his  house  as  an  expense.  When  he  builds  a 
shop  or  a  factory,  he  calculates  what  profit  he  can  make 
out  of  it.  When  he  builds  a  house  he  calculates  how  much 
of  the  income  derived  from  the  business  carried  on  in  other 
buildings  he  can  afford  to  expend  in  house  rent.  No  doubt 
house  building  and  house  renting  are  trades.  The  builders 
and  the  owners  of  tenement  houses  regard  them  not  as 
sources  of  expense,  but  of  profit ;  but  that  is  not  the  view 
of  the  occupants.  No  doubt,  too,  we  may  treat  man  as 
a  producing  machine,  requiring  food  and  shelter,  just  as 


348  METHODS  OF  TAXATION 

a  steam  engine  requires  fuel  and  protection  against  the 
weather.  But  that  would  be  to  turn  economics  upside 
down ;  it  would  be  as  perplexing  as  adding  a  fourth  dimen- 
sion to  space.  It  seems  proper  therefore  to  treat  house 
rent  as  belonging  with  expense  and  not  with  income,  and 
to  regard  a  tax  on  house  rent  as  an  income  tax. 

The  real  estate  tax,  therefore,  comprises  a  tax  on  un- 
earned or  public  value,  a  tax  on  buildings  used  as  instru- 
ments of  production,  and  a  tax  on  expense ;  although  these 
taxes  are  often  inextricably  mingled.  The  last  tax,  as 
has  been  shown,  has  very  great  fiscal  advantages.  It  can 
be  collected  with  the  same  machinery  as  the  ordinary  real 
estate  tax  —  although  this  is  not  done  in  England  —  and 
at  no  additional  expense.  It  accomplishes  the  purpose 
of  the  income  tax,  with  none  of  its  evils.  It  can  be  made 
progressive,  and  in  that  event  tends  to  fall  on  rent.  It 
can  be  avoided,  but  it  will  be  avoided  only  by  those  who 
do  not  feel  able  to  pay  it,  or  by  the  parsimonious,  whose 
savings  are  necessarily  poured  into  the  great  reservoir  of 
capital  from  which  all  business  is  supplied,  and  whom  it 
is  therefore  advantageous  to  exempt  from  taxation,  just 
as  it  is  advantageous  to  exempt  any  productive  agency. 
For,  it  must  be  repeated,  the  opportunities  of  the  poor 
are  limited,  not  by  the  accumulations  of  the  rich,  but  by 
their  extravagance.  The  rich  man  who  spends  little,  neces- 
sarily invests  his  income.  He  pays  laborers  and  supports 
industries.  He  expends  a  part  of  his  income  for  food 
and  clothing  and  house  ren,t;  the  rest  goes  to  other  men 
who  are  thereby  enabled  not  only  to  pay  for  food  and 
clothing  and  house  rent,  but  who  also  create  food  and 
clothing  and  houses  of  a  greater  value  than  what  they 
consume.  It  can  seldom  be  disadvantageous  to  the  com- 


THE  COST  OF  COLLECTING  TAXES      349 

munity  to  tax  extravagance  and  waste;  it  must  always 
be  injurious,  although  it  may  be  unavoidable,  to  tax  pru- 
dence and  frugality. 

We  have  not  in  this  country  the  necessary  materials 
for  estimating  the  amount  of  house  rent.  It  is  otherwise 
in  England,  and  the  returns  for  the  inhabited  house  duty 
are  instructive.  This  tax  is  not  levied  on  buildings  used 
in  trade,  unless  they  are  also  used  as  dwellings;  nor  does 
it  fall  on  houses  renting  for  less  than  £20  a  year.  The 
total  number  of  premises  is  about  8,300,000,  the  number 
exempt  being  about  6,500,000,  of  an  annual  value  of  over 
£104,000,000,  and  the  number  charged  being  more  than 
1,800,000,  of  a  value  of  some  £90,000,000.  Of  the 
premises  charged,  those  renting  from  £20  to  £41  number 
about  1,230,000,  and  those  renting  from  £41  to  £80  about 
390,000.  Between  £80  and  £100,  the  number  is  about 
60,000 ;  between  £100  and  £150,  about  70,000 ;  between 
£150  and  £200  some  27,000;  and  between  £200  and 
£300,  about  22,000.  The  number  of  premises  renting  for 
more  than  £300  falls  off  rapidly;  between  £300  and  £400 
it  is  less  than  9,000;  between  £400  and  £500,  a  little  over 
4,000;  between  £500  and  £600,  under  2,300;  between 
£600  and  £700,  about  1,500;  between  £700  and  £1,000, 
about  1,800;  and  over  £1,000  it  was  in  1903-04  the 
same.  The  rate  of  duty  on  premises  of  an  annual  value 
between  £20  and  £60  rises  from  two  pence  in  the  pound 
to  six  pence;  beyond  that  the  rate  is  not  increased.  It 
may  be  remarked  that  the  rental  of  premises  in  the  metrop- 
olis is  one-third  of  the  total  for  the  country,  and  that  the 
rental  of  those  worth  over  £600  is  two-thirds  the  total  for 
premises  of  that  class. 

This  duty  is  to  a  considerable  extent  degressive;    the 


350  METHODS  OF  TAXATION 

annual  value  of  exempt  premises  being  more  than  that  of 
those  taxed;  and  the  value  of  those  partly  exempt  being 
nearly  £50,000,000.  The  value  of  those  between  £60  and 
£100  is  some  £11,500,000;  of  those  over  £1,000  it  is 
about  £3,750,000.  What  is  somewhat  surprising,  in  view 
of  the  heavy  taxation  recently  imposed  on  the  rich,  the 
number  of  premises  renting  for  more  than  £500  continues 
to  increase  nearly  as  rapidly  as  before.  The  assessment 
of  this  tax  should  occasion  very  little  expense ;  all  houses 
are  assessed  to  the  rates,  and  one  assessment  ought  to  suffice 
for  all  purposes.  In  view  of  the  enormous  cost,  both  in 
money  and  vexation,  of  the  income  tax,  and  of  its  viola- 
tion of  the  principles  of  justice,  the  house  duty  might 
very  well  be  substituted  for  it.  Much  of  the  so-called  in- 
come tax  is  already  derived  from  land,  and  from  taxes 
on  permanent  investments,  and  can  be  collected  without 
resorting  to  self-assessment.  Its  effect  has  been  to  depre- 
ciate the  values  of  these  investments,  and  little  injustice 
would  now  be  caused  by  retaining  it.  The  amount  of  the 
income  tax  proper  is  not  so  large  that  it  could  not  be 
replaced  by  increasing  the  house  duty.  Leaving  houses 
renting  for  less  than  £20  exempt,  there  would  remain 
nearly  £100,000,000  of  rental  value,  which  could  very  well 
be  taxed  at  ten  per  cent.  The  charge  to  the  community 
would  be  no  greater  than  before ;  and  probably  it  would  be 
greater  in  the  case  of  only  a  few  individuals,  except  in 
so  far  as  the  progressive  feature  was  extended.  On  the 
other  hand,  the  saving  in  expense  would  probably  far  more 
than  make  up  for  the  abatements  and  repayments  that 
now  complicate  the  system.  It  would  be  practicable  — 
although  not  fiscally  desirable  —  to  extend  the  duty  to 
premises  used  for  trade,  the  rental  value  of  which  is  of 


THE  COST  OF  COLLECTING  TAXES      351 

course  in  such  a  country  as  England  very  great.  Such 
premises  are  already  in  effect  taxed  through  the  tax  on 
the  profits  of  their  occupants;  were  this  tax  removed,  a 
corresponding  one  on  rental  values  would  be  no  additional 
burden  to  trade,  and  the  change  would  remove  a  prolific 
source  of  discontent  and  dishonesty. 

It  is  evident  that  for  the  proper  assessment  of  such  a 
tax,  or  of  any  tax  on  real  estate,  there  must  be  established 
principles  of  valuation,  applied  by  men  of  experience. 
In  England  land  is  rented  more  commonly  than  in  this 
country,  and  it  is  probable  that  information  concerning 
the  terms  of  leases  is  more  easily  obtained  than  here.  In 
the  City  of  New  York  it  is  the  practice  of  the  assessors 
to  fix  the  value  of  the  land  in  a  somewhat  arbitrary  man- 
ner, and  to  estimate  the  cost  of  replacing  whatever  build- 
ings may  be  standing  thereon,  due  allowance  being  made 
for  the  fitness  of  the  building  for  its  site,  and  for  depre- 
ciation. In  England  the  allowance  for  this  account  and 
for  repairs  may  be  as  much  as  twenty  per  cent,  but  no 
such  rule  seems  to  obtain  here.  In  New  York,  after  the 
land  is  valued  at  a  certain  rate  per  front  foot  —  which 
rate  may  prevail  for  a  whole  block,  or  may  change  with 
every  lot,  —  the  number  of  square  feet  is  calculated,  and 
then  the  number  of  square  feet  of  floor  surface.  Frame 
dwellings  and  factories,  it  is  assumed,  may  be  replaced  at 
a  cost  of  from  $1  to  $3  per  foot  of  floor  surface ;  ordinary 
brick  dwellings  for  $3  to  $5 ;  modern  office  buildings  and 
hotels  from  $3.50  to  $8 ;  and  very  costly  buildings  for  as 
much  as  $10.  In  making  these  valuations  the  assessors 
are  guided  by  reported  sales,  by  mortgages,  by  leases,  and 
by  whatever  knowledge  they  may  be  able  to  procure.  They 
are  not  elective  officers,  but  hold  their  positions  by  a  secure 


352  METHODS  OF  TAXATION 

tenure.  They  could  hardly  accomplish  their  work  if  their 
term  of  office  were  short  and  uncertain,  as  is  commonly 
the  case  in  other  communities. 

Were  this  system  of  valuation  supplemented  by  a  prop- 
erly constituted  court  for  hearing  appeals  from  the  judg- 
ments of  the  assessors,  as  near  an  approach  to  justice  as 
is  practicable  would  perhaps  be  attained.  Value  is  es- 
sentially uncertain  and  indefinite.  It  means  the  price 
which  will  be  paid  for  a  thing  by  a  purchaser;  but  pur- 
chasers differ  in  their  estimates,  in  their  knowledge,  in 
their  needs,  and  in  their  means.  All  that  an  assessor  can 
do  is  to  learn  what  prices  are  commonly  paid,  and  to 
compare  similar  properties.  He  may  never  be  quite 
accurate  in  his  judgment;  but  if  competent,  he  should 
never  be  very  far  wrong.  If  his  assessment  of  a  par- 
ticular parcel  is  too  high,  the  aggrieved  taxpayer  should 
have  prompt  and  cheap  relief  by  appeal;  if  too  low,  the 
owners  of  adjacent  property  should  have  similar  relief. 
And,  whatever  the  imperfections  of  such  a  system,  they 
seem  to  be  less  than  in  any  other  that  human  ingenuity 
has  contrived. 

It  is  probably  true  that  land  owners,  as  a  class,  would 
view  with  alarm  any  proposal  that  seemed  likely  to  in- 
crease their  burdens.  Yet  if  taxes  are  shifted  and  diffused, 
it  can  scarcely  be  denied  that  nearly  all  the  charges  levied 
on  personal  property  and  on  trade  fall  eventually  on  land, 
and  with  enormously  increased  weight.  Were  these  taxes 
abolished,  the  value  of  land  would  inevitably  be  increased. 
The  larger  profits  would  impel  men  to  make  larger  in- 
vestments, and  enable  them  to  pay  higher  rents.  The  vast 
saving  in  the  cost  of  collecting  taxes  by  the  existing  methods 
would  constitute  a  fund  that  would  be  divided  among  all 


THE  COST  OF  COLLECTING  TAXES      353 

the  members  of  the  community,  the  landlords  included; 
and  the  share  of  the  landlords  might  well  be  far  more  than 
would  compensate  them  for  their  increased  taxes.  It 
must  not  be  forgotten  that  the  exemption  of  personal  prop- 
erty is  no  untried  experiment.  Such  exemption,  so  far 
as  local  taxation  is  concerned,  has  long  prevailed  to  a 
great  extent  in  Pennsylvania,  and  certainly  few  states 
have  enjoyed  greater  prosperity.  It  has  practically,  though 
not  legally,  prevailed  in  many  other  communities;  in  the 
City  of  Buffalo,  for  example,  personal  property  forms  only 
2.1  per  cent  of  the  total  assessment. 

To  increase  suddenly  the  burden  on  land,  if  the  increase 
were  considerable,  would  certainly  be  unjust.  The  gov- 
ernment is  estopped  by  its  prolonged  recognition  of  the 
rights  of  landlords,  and  their  expectations  of  secure  pos- 
session are  reasonable.  But  justice  does  not  seem  to  de- 
mand that  speculative  and  prospective  values  shall  be 
protected;  it  is  only  when  the  action  of  government  di- 
minishes the  present  market  value  of  land  that  it  can  be 
called  unjust.  Furthermore,  the  negative  decrease  of 
value,  as  it  may  be  called,  caused  by  securing  to  the  pub- 
lic the  future  increment,  can  injure  no  one.  It  is  only 
the  present  owners  of  land  that  can  suffer  from  a  new 
tax  upon  it;  the  claims  of  heirs  and  devisees  being,  so 
to  speak,  latent  in  the  present  ownership.  After  the 
tax  is  imposed  the  market  value  of  the  land  is  reduced; 
a  purchaser  computes  the  profit  to  be  made  from  using  the 
land,  reckoning  the  tax  as  an  expense,  and  pays  a  corre- 
spondingly lower  price.  The  tax  is  therefore  no  burden 
on  him,  nor  on  any  subsequent  purchaser.  They  cannot 
complain  of  the  injustice  of  a  burden  which  already  lay 
on  the  property  when  they  bought  it,  which  they  assumed 

23 


354  METHODS  OF  TAXATION 

with  full  knowledge  of  its  weight,  and  which  was  in  effect 
extinguished  in  the  reduction  of  the  purchase  price.1 

The  reasons  above  given  make  it  probable  that  land 
owners  would  in  several  ways  be  more  than  recompensed 
for  the  apparent  increase  of  their  taxes.  But,  whether 
this  be  true  or  not,  it  is  certain  that  not  only  they,  but 
the  whole  people  might  be  relieved  of  a  heavy  burden  by 
a  very  simple  reform.  There  are  at  present  three  bodies 
of  tax-gatherers,  —  the  collectors  employed  by  the  coun- 
ties, cities,  towns  and  smaller  taxing  districts;  those  of 
the  states;  and  those  of  the  general  government.  It  is 
perhaps  common  to  assume  that,  as  every  governing  body 
requires  revenue,  it  should  have  its  own  force  of  collectors ; 
but  this  assumption  does  not  bear  examination.  Provided 
the  necessary  amount  of  revenue  can  be  raised  by  one  sys- 
tem of  taxes  and  one  body  of  officers,  the  presumption  is 
in  favor  of  its  being  so  raised.  In  order  to  understand 
why  this  simple  system  has  not  prevailed,  a  brief  retrospect 
is  necessary. 

Curiously  enough,  an  attempt  was  made  to  apply  it  in 
part  at  the  time  of  the  separation  of  the  colonies  from  the 
mother  country.  The  Articles  of  Confederation  provided 
that  taxes  were  to  be  apportioned  among  the  states  "  in 
proportion  to  the  value  of  all  land  within  each  state 
granted  to  or  surveyed  for  any  person,  as  such  land  and 
the  buildings  and  improvements  thereon  shall  be  estimated, 
according  to  such  mode  as  the  United  States  in  Congress 
assembled  shall  from  time  to  time  direct  and  appoint," 
the  taxes  for  paying  that  proportion  to  be  laid  and  levied 
by  the  state  legislatures.  The  feebleness  of  the  state  gov- 
ernments, and  their  jealousies,  rendered  this  and  all  other 

1  See  Appendix  C. 


THE  COST  OF  COLLECTING  TAXES      355 

measures  for  obtaining  revenue  by  taxation  nugatory,  and 
the  Congress  was  compelled  to  resort  to  foreign  loans,  and 
to  the  miserable  expedient  of  issuing  paper  money  to  which 
a  forced  currency  was  legally  given.  When  the  Consti- 
tution was  adopted,  this  principle  was  abandoned,  for 
reasons  which  it  is  unnecessary  to  detail,  and  instead  it 
was  provided  that  direct  taxes,  as  well  as  representatives, 
should  be  apportioned  among  the  states  according  to 
population. 

But  as  wealth  was  not  then,  and  has  never  since  been, 
proportioned  to  population,  direct  taxes  have  been  seldom 
laid  by  the  general  government,  and  when  laid  have  aroused 
so  much  opposition  as  to  have  been  unproductive  of  reve- 
nue. For  similar  reasons  excise  taxes  were  soon  given 
up,  and  not  renewed  until  the  emergency  of  the  civil  war. 
The  general  government  began  at  once  to  rely  on  customs 
duties,  and  until  that  time  this  was  practically  its  only 
source  of  revenue. 

For  many  years  the  state  governments  were  carried  on 
with  very  little  expense,  and  the  principle  stated  in  the 
Articles  of  Confederation  was  generally  recognized,  a  small 
surtax  for  state  purposes  being  added  to  the  taxes  levied 
by  the  local  authorities,  and  this  surtax  was  collected  by 
the  same  tax-gatherers.  Of  late,  however,  the  real  or 
pretended  needs  of  the  state  governments  have  enormously 
increased,  and  the  amount  of  the  surtax  has  become  a  very 
serious  matter.  The  result  has  been  to  develop  all  the 
evils  attendant  on  the  method  of  self-assessment.  As  the 
basis  of  the  state  tax,  the  valuations  of  property  made 
by  the  assessors  of  the  minor  political  divisions  were  taken. 
The  smaller  the  assessed  valuation  of  the  property  in  a 
town,  therefore,  the  smaller  the  state  tax;  and  in  spite 


356  METHODS  OF  TAXATION 

of  drastic  provisions  commanding  assessors  to  list  prop- 
erty at  its  fair  market  value,  the  pressure  of  local  senti- 
ment was  too  great  to  be  resisted.  Such  assessors  as 
complied  with  the  law  caused  heavy  penalties  to  be  laid 
on  their  districts,  in  the  shape  of  disproportionately  heavy 
state  taxes.  Such  assessors  as  disregarded  the  law,  and 
assessed  property  below  its  value,  procured  exemptions  for 
their  localities  in  the  shape  of  disproportionately  light 
state  taxes.  Assessors  of  the  former  class  were  unpopular, 
and  were  not  reflected.1  Inequalities  as  outrageous  as 
in  the  case  of  the  taxation  of  individuals  were  of  common 
occurrence,  and  the  attempts  of  the  state  authorities  to 
equalize  assessments  were  but  partly  successful.  Under 
these  circumstances  the  inducement  to  resort  to  indirect 
taxation,  in  order  to  secure  revenue  for  the  state,  was  too 
strong  to  be  resisted,  and  a  number  of  new  taxes,  and  an 
additional  force  of  tax-gatherers,  were  created.  Such,  in 
a  general  way,  is  the  explanation  of  the  existence  of  three 
practically  independent  systems  of  taxation  in  this  coun- 
try. The  tendency  in  this  direction  has  of  course  been 
increased  by  the  natural  desire  of  rulers  to  conceal  from 
their  subjects  the  extent  of  their  exactions,  through  the 
device  of  indirect  taxes. 

When  the  union  was  formed,  it  would  probably  have 
been  impossible  for  the  general  government  to  obtain  its 
revenue  by  direct  taxation.  Its  powers  were  not  defined 
by  the  judicial  interpretation  of  the  Constitution,  and  obe- 
dience to  its  mandate  was  at  first  reluctantly  yielded.  It 
is  now  beyond  question  supreme,  and  little  resistance  seems 
likely  to  be  offered  by  the  state  governments  to  any  taxation 
that  it  decides  to  impose.  Were  the  necessary  amendment 

1  See  Appendix  A. 


THE  COST  OF  COLLECTING  TAXES      357 

to  the  Constitution  made,  it  would  be  entirely  practicable 
to  raise  all  the  revenue  of  the  national  government  by 
means  of  a  direct  tax,  proportioned  to  the  revenue  received 
by  the  state  and  local  governments,  and  it  would  be  equally 
practicable  for  the  state  governments  to  obtain,  as  they 
have  in  some  fashion  in  the  past,  all  their  revenue  by 
means  of  a  direct  tax,  proportioned  to  the  revenue  of 
their  constituent  political  bodies.  The  change  above  re- 
ferred to,  by  which  this  reform  could  be  effected,  is  as 
simple  as  it  would  be  revolutionary.  It  consists  merely 
in  applying  the  principle  of  the  income  tax  to  the  case 
of  municipalities. 

The  chief  objection  to  a  tax  imposed  on  the  income  of 
the  individual  is  that  the  individual  is  called  on  to  dis- 
close his  income ;  this  process  of  self -assessment  resulting, 
as  we  have  seen,  in  the  most  demoralizing  injustice.  But 
this  objection  does  not  arise  when  we  wish  to  learn  the 
income  of  a  political  body.  The  amount  of  its  revenue, 
as  well  as  that  of  its  expenditure,  is  a  matter  of  public 
record,  and  it  can  always  be  ascertained  by  inspection. 
Instead  of  basing  the  state  tax  on  the  assessed  valuation 
of  the  property  owned  in  any  municipality,  the  legislature 
should  have  based  it  on  the  municipal  income;  or,  what 
is  nearly  the  same  thing,  the  municipal  expenditure.  To 
have  done  so  would  have  extinguished  all  the  evils  whose 
existence  led  to  the  imposition  of  the  present  state  taxes. 
It  would  have  removed  all  inducement  to  assess  property 
at  less  than  it  was  worth;  whether  it  was  listed  at  its 
full  value  or  at  a  nominal  figure  would  have  been  a  matter 
of  purely  local  concern. 

Only  in  exceptional  cases  does  the  revenue  of  a  munici- 
pality fail  to  indicate  the  wealth  of  its  inhabitants.  A 


358  METHODS  OF  TAXATION 

town  where  there  is  little  wealth  can  spend  little  on  its 
government,  and  its  share  of  the  state  tax  would  be  of 
trifling  amount.  A  rich  city  maintains  an  expensive  gov- 
ernment, and  can  afford  to  pay  a  large  tax  to  the  state. 
There  is  perhaps  no  more  accurate  measure  of  the  ability 
of  the  inhabitants  of  a  community  to  contribute  to  the 
support  of  the  government  of  the  state,  than  their  ability 
to  contribute  to  the  support  of  the  government  of  their 
community;  and  this  ability  is  measured  by  the  amount 
contributed.  As  a  matter  of  fact,  the  indirect  taxes  now 
collected  at  so  much  expense  by  the  state  are  probably 
distributed  among  its  communities  in  very  nearly  this 
proportion.  Furthermore,  taxation  in  the  manner  de- 
scribed would  tend  to  check  extravagance  in  both  state  and 
local  governments;  the  amount  of  the  state  tax  would 
be  brought  to  the  attention  of  all  taxpayers,  and  the  legis- 
lators would,  as  experience  has  shown,  dread  to  increase 
it.  On  the  other  hand,  the  local  authorities,  knowing 
that  if  they  increased  taxes,  the  state  tax  would  increase, 
might  be  more  prudent  in  their  disbursements. 

The  total  amount  of  what  may  be  called  the  public  in- 
come in  every  state  being  thus  accurately  known,  to  levy 
a  proportional  surtax  on  this  income  for  national  purposes 
would  require  the  employment  of  but  a  few  scores,  or  at 
most  a  few  hundreds,  of  clerks.  The  expense  of  collecting 
the  national  revenue  in  this  manner  would  perhaps  not 
be  a  thousandth  part  of  what  it  is  now;  nor  would  the 
cost  of  paying  taxes  be  diminished  in  a  less  degree.  So 
great  a  relief  from  unnecessary  burdens  seems  to  be  clearly 
just;  and  the  general  conclusion  seems  reasonable  that 
taxation  according  to  the  economic  method  best  conforms 
to  the  commonly  accepted  rules  of  justice. 


THE  COST  OF  COLLECTING  TAXES      359 

There  is,  of  course,  no  present  possibility  of  establish- 
ing such  a  system  of  taxation  as  is  here  suggested;  those 
interested  in  maintaining  existing  abuses  are  too  thor- 
oughly entrenched  to  be  dislodged.  Indeed,  the  tendency 
is  now,  and  seems  likely  to  be  for  some  time  to  come,  to 
multiply  taxes,  and  to  increase  the  numbers  and  the 
emoluments  of  those  who  derive  their  subsistence,  directly 
or  indirectly,  from  this  source.  Should  this  tendency  be 
reversed,  it  would  be  easy  to  present  an  overwhelming 
body  of  proof  in  support  of  the  claims  of  the  economic 
method.  But  it  is  not  the  aim  of  this  treatise  to  elaborate, 
or  even  to  advocate,  particular  measures  of  taxation.  Its 
aim  will  be  attained  if  it  shall  direct  attention  to  the  de- 
plorable inconsistency  between  our  practices  in  taxation 
and  the  rules  of  justice  that  are  universally  recognized. 

The  air  is  filled  with  outcries  against  the  unprincipled 
conduct  of  many  of  those  who  carry  on  the  great  indus- 
tries of  the  country.  It  seems  strange  that  it  does  not 
occur  to  the  authors  of  these  complaints  to  ask  if  the 
unprincipled  conduct  of  our  rulers  does  not  make  it  hard 
for  upright  men  to  carry  on  business  at  all.  The  evidence 
here  presented  shows  that  such  men  must  enter  the  race 
with  a  grievous  handicap;  they  must  pay  charges  that 
their  unscrupulous  rivals  do  not  pay.  The  calumnies  of 
a  licentious  press,  the  malicious  attacks  of  a  despotic  ex- 
ecutive, may  be  met  by  upright  men  with  a  high  front; 
but  how  can  they  meet  competitors  whom  the  laws  enable 
to  use  the  weapons  of  evasion  and  deception,  even  of 
bribery  and  perjury? 

It  is  notorious  that  many  charters  for  public  service 
corporations  have  been  corruptly  obtained.  It  is  equally 
true  that  without  bribery  they  would  not  have  been  granted. 


360  METHODS  OF  TAXATION 

There  was  no  dearth  of  men  of  wealth  and  probity  who 
would  have  been  glad  to  secure  these  franchises,  could  they 
have  done  so  without  soiling  their  hands;  they  did  not 
care  to  submit  proposals  that  would  have  been  laughed 
at  by  rulers  accustomed  to  get  gain  by  trafficking  in  the 
rights  of  the  community.  Our  legislators  know  the  re- 
quirements of  justice.  -  Commission  after  commission  has 
reported  the  iniquities  of  the  present  laws ;  men  in  every 
department  of  industry  have  pleaded  not  to  be  forced  to 
be  dishonest,  but  they  have  pleaded  in  vain.  Under  pres- 
ent conditions  scrupulous  men  often  cannot  succeed;  they 
must  give  up  their  scruples  or  give  up  their  business. 
Nevertheless  affairs  must  be  carried  on;  if  not  by  honest 
men,  then  by  others.  As  a  result,  the  whole  tone  of  the 
industrial  world  has  been  lowered ;  that  chastity  of  honor, 
that  sensibility  of  principle,  which  will  not  stain  itself 
by  deception,  is  gone.  Nothing  would  do  more  to  elevate 
business  morality  than  to  remove  the  temptations  to  palter 
with  conscience  that  are  now  confessedly  overpowering. 
Nothing  would  be  more  advantageous,  and  nothing  more 
just,  than  to  encourage  men  of  the  highest  character  to 
engage  in  the  activities  from  which  they  are  excluded  by 
our  present  systems  of  taxation. 


APPENDICES 


APPENDIX   A 
EXTRACT  FROM  " TAXATION  OF  PERSONAL  PROPERTY" 

BY  LAWSON  PURDY 

THE  labor  and  skill  required  to  make  a  reasonably  fair  as- 
sessment of  personal  property  is  simply  appalling;  the  mere 
enumeration  of  some  of  the  items  of  personal  property  which 
might  be  owned  by  any  prosperous  citizen  is  a  sufficient  dem- 
onstration of  this.  The  assessor  might  start  at  the  taxpayer's 
residence,  where  he  must  value  all  the  furniture,  pictures, 
works  of  art,  bric-a-brac,  plate,  linen,  wearing  apparel,  books, 
jewelry,  including,  of  course,  the  jewelry  and  wearing  apparel 
actually  being  worn  by  members  of  the  family.  In  order  to 
make  a  fair  valuation,  the  assessor  must  be  an  expert  in  valu- 
ing paintings,  antique  furniture,  jewelry,  carpets,  and  prac- 
tically have  expert  knowledge  of  every  class  of  articles  in  the 
house.  An  ordinary  man  could  do  little  more  than  value 
paintings  by  the  square  foot;  and  one  picture  a  foot  square 
might  be  worth  $5,000,  while  another  five  feet  square  might 
be  worth  $5.  One  antique  rug  would  readily  sell  at  auction 
for  $1,000  and  a  much  larger  one  might  be  worth  less  than 
$100.  Unless  the  assessor  were  an  expert  in  valuing  precious 
stones,  he  would  be  thousands  of  dollars  out  of  the  way  in 
setting  a  value  on  the  jewelry  of  hundreds  of  New  York 
families. 

From  the  residence  of  the  taxpayer  the  assessor  might  then 
go  to  his  stable,  and  there  he  would  have  to  be  an  expert  in 
valuing  horses,  harness,  and  carriages,  for  it  would  not  be 
difficult  to  make  an  error  of  several  thousand  dollars  in  valu- 
ing three  or  four  horses. 

Let  us  suppose  that  our  taxpayer  is  a  merchant,  and  carries 
a  large  stock  of  goods,  then  the  assessor's  next  duty  would  be 
to  value  that  stock  of  goods.  Every  one  knows  that  it  would 
take  the  merchant's  own  clerks  several  weeks  to  make  a  cor- 
rect inventory  of  his  stock,  and  they  would  know  the  actual 
prices  paid  for  the  goods,  while  the  assessor  must  estimate 
their  value  by  mere  inspection. 


364  APPENDICES 

It  is  perfectly  clear  that  the  most  skillful  man  could  not 
possibly  make  a  fair  appraisal  of  even  one  small  department 
store  in  a  week's  time. 


THE  SYSTEM  IN  CITIES  OP  NEW  YORK 

The  actual  working  of  the  system  in  New  York  is  very  much 
simpler  than  the  method  outlined,  and  the  work  in  the  old 
City  of  New  York  was  all  done  by  two  or  three  men.  As 
described  by  Mr.  Feitner,1  Commissioner  of  Taxes,  the  names 
of  persons  who  are  likely  to  be  possessed  of  taxable  personal 

1  Testimony  of  Hon.  Thos.  L.  Feitner,  President  Department  of 
Taxes  and  Assessments,  before  Mazet  Committee,  as  reported  in  New 
York  Sun,  June  2,  1899: 

"Q.  —  How  is  the  roll  made  up?  A.  —  The  City  Directory  is  taken 
for  the  names.  Inquiry  is  made  as  to  location,  business,  etc.,  and  any 
further  information  that  is  attainable  is  taken.  Then  the  man  is  put  on 
the  books  if  he  is  taxable.  It  is  a  sort  of  sifting  process.  If  a  man 
swears  off  taxes  one  year  he  is  n't  put  on  for  a  year  or  two. 

"Q.  —  Do  you  generally  accept  a  man's  affidavit?  A.  —  Not 
necessarily.  If  we  know  he  's  all  right  or  if  his  circumstances  are  ob- 
viously poor  we  do. 

"Q.  —  Now,  doesn't  the  tax  system  as  at  present  constituted  — 
I'm  not  holding  you  responsible  for  it  or  intimating  that  you  are  in  any 
way  to  blame  —  does  n't  it  result  in  a  lot  of  people  who  have  saved  up 
a  couple  of  thousand  dollars  getting  on  the  tax  list  while  a  lot  of  rich 
persons  go  unnoticed  ?  A.  —  Yes,  it  does.  It 's  a  very  defective  sys- 
tem and  works  great  injustice.  It 's  been  compared  to  a  trap  that  lets 
the  big  fish  through  while  the  little  ones  are  caught.  The  great  ma- 
jority of  persons  who  pay  personal  taxes  are  worth  under  $10,000,  and 
there  are  few  who  pay  on  more  than  $100,000." 

Mr.  Harkness,  former  tax  assessor  of  Brooklyn,  said  before  the  Manu- 
facturers' Association  of  New  York,  December  19,  1898: 

"  I  made  inquiry  in  regard  to  the  way  and  manner  they  had  been  as- 
sessing heretofore,  and  they  told  me  that  they  simply  guessed  at  it. 
If  a  man  in  the  manufacturing  business  was  prosperous  looking,  he  had 
a  pretty  good  assessment  levied  upon  him.  If  he  lived  in  a  brownstone 
house,  he  was  assessed  $10,000;  if  he  lived  in  a  brick  house,  he  was  as- 
sessed a  little  less;  and  if  he  lived  in  a  frame  house  he  got  off  for  $2,000. 
Some  amusing  episodes  came  up  in  my  experience  every  once  in  a 
while.  We  had  a  servant  in  a  gentleman's  house,  a  coachman,  who  was 
assessed  for  $5,000,  simply  because  his  residence  was  with  his  master. 
The  whole  system  of  personal  assessments  in  Brooklyn  —  and  I  do  not 
know  that  it  is  any  different  in  New  York  —  is  simply  absurd." 


APPENDICES 


365 


property  are  taken  from  directories,  and  they  are  assessed  for 
a  sum  which  is  thought  to  be  in  keeping  with  their  manner 
of  living.  Many  men  are  placed  on  the  rolls  who  have  no 
property  in  excess  of  their  debts,  and  many  thousands,  who 
have  taxable  property,  escape  altogether. 

The  difficulty  of  assessing  all  personal  property  in  a  large 
city  is  proportionately  much  greater  than  in  small  towns.1  In 
1903  the  number  of  individuals,  corporations,  and  estates  who 
were  assessed  in  the  City  of  New  York  was  78,339 ;  of  these 
37,687  appeared  before  the  tax  commissioners  and  swore  that 
they  had  no  taxable  property  in  excess  of  their  debts,  and  the 
whole  number  taxed  was  40,652.  This  is  a  very  small  propor- 
tion of  the  total  population,  a  smaller  proportion  than  the 
same  effort  would  have  obtained  in  small  towns.  In  thirty- 
two  cities  of  Massachusetts,  with  an  average  population  of  less 

1  Comparison  between  some  large  cities  and  small  towns  of  New 
VTork,  showing  the  percentage  of  personal  property  to  the  total  assessed 
valuation : 


City  or  Town. 

County. 

Assessed  Value 
of  Personal 
Property. 
1901. 

Total  Assessed 
Value  of  Real 
and  Personal 
Property. 
1901. 

Per  Cent 
of  Per- 
sonal to 
Total. 

LARGE  CITIES. 

Albany  .    .    . 
Buffalo  .    .    . 

Albany  .... 
Erie    

$3,712,875 
7,522,000 

$65,073,275 
242  262  073 

5.7 
3  1 

Rochester 

Monroe  .    . 

9,145,662 

116,448,973 

7.9 

Syracuse    .    . 
Troy  .... 

Onondaga 
Rensselaer 

6,058,243 
3,406,137 

87,143,653 
53,802,814 

7.2 
6.3 

SMALL  TOWNS. 

Friendship 

Allegany    . 

223,168 

1,037,848 

21.5 

Olean     . 
Ausable 

Cattaraugus 
Clinton  . 

1,020,267 
98,800 

4,170,157 
555,370 

24.3 
17.7 

Hudson 

Columbia 

1,389,860 

5,485,160 

25.9 

Kinderhook 

Columbia 

529,645 

2,160,435 

24.5 

Stamford 

Delaware 

331,145 

1,080,425 

30.6 

Ashland 

Greene   . 

55,500 

214,720 

25.8 

Lowville 

Lewis     . 

618,600 

2,525,930 

24.8 

Geneseo 

Livingston 

975,050 

3,412,165 

27.4 

Otsego    . 

Otsego    . 

508,550 

2,545,525 

20.0 

Charlton 

Saratoga 

127,350 

622,999 

20.0 

Hartford 

Washington 

171,980 

726,549 

23.6 

These  large  cities  have  twenty-nine  times  the  value  in  real  estate  that  the 
small  towns  have,  but  only  five  times  the  value  in  personal  property. 

366 


APPENDICES 


than  50,000  persons,  the  number  taxed  on  personal  property 
was  82,211.  If  the  same  proportion  had  been  taxed  in  the 
City  of  New  York,  the  number  would  have  exceeded  180,000. 
The  persons  taxed  in  Massachusetts  were  put  upon  the  assess- 
ment rolls  by  the  same  methods  as  those  in  use  in  New  York, 
only  five  per  cent  having  made  sworn  returns  as  required  by 
law.  These  results  can  only  be  attributed  to  the  greater  ease 
of  assessment  in  smaller  places. 

When  the  City  of  New  York  was  smaller,  personal  prop- 
erty paid  a  larger  share  of  the  tax.  In  1865,  personal  property 
paid  35  per  cent,  in  1870,  29  per  cent,  in  1898,  21.5  per  cent, 
and  in  1903,  12.5  per  cent  of  the  total.  Other  cities  of  the 
state  show  a  similar  decrease  in  the  assessment  of  personal 
property.1 

A  TAX  ON  HONESTY  AND  INTELLIGENCE 

The  result  of  this  haphazard,  impracticable  method  of  rais- 
ing revenue  has  been  serious  injustice  to  those  cities  wheie 
tax  assessors  are  intelligent,  honest,  and  efficient,  and  enor- 
mous injustice  to  individuals,  more  ignorant  or  more  honet 
than  their  neighbors.  Those  cities  have  prospered  most  where 
the  assessors  have  been  negligent  or  incapable.  Tax  officials 


1  A  comparison  between  the  assessed  valuation  of  real  and  personal 
property  in  1870  and  1901,  for  four  counties  of  New  York,  which  con- 
tain large  cities : 


County. 

1901. 

1870. 

Real. 

Personal. 

Per  cent 
of  Per- 
sonal to 
Total. 

Real. 

Personal. 

Per 
cent  of 
Per- 
sonal 
to 
Total. 

Albany     . 
Erie  .    .    . 
Monroe     . 
Rensselaer 

$93,297,880 
277,307,745 
142,745,862 
72,357,516 

$5,581,950 
9,981,128 
10,929,842 
5,051,068 

05.6 
03.4 
07.1 
06.5 

$35,345,497 
41,462,863 
23,066,624 
21,720,013 

$7,669,879 
11,431,680 
2,739,692 
7,796,515 

17.0 
22.0 
10.0 
27.0 

Total    . 

$585,709,003 

$31,543,988 

05.1 

$121,594,997 

$29,637,766 

19.1 

APPENDICES  367 

in  this  state  have  complained  of  the  injustice  of  our  tax  sys- 
tem in  almost  every  report.1 

1  Some  quotations  from  the  reports  on  taxation  of  officers  of  the 
Stateof  New  York: 

Official  documents  tell  us  that,  "instead  of  being  a  tax  upon  per- 
sonal property,  it  has  in  effect  become  a  tax  upon  ignorance  and  hon- 
esty. That  is  to  say,  its  imposition  is  restricted  to  those  who  are  not 
informed  of  the  means  of  evasion,  or,  knowing  the  means,  are  restricted 
by  a  nice  sense  of  honor  from  resorting  to  them"  (Report  of  Com.  of 
Taxes  and  Assessments,  City  of  N.  Y.,  1872,  p.  9). 

The  defects  of  our  system  are  too  glaring  and  operate  too  oppres- 
sively to  be  longer  tolerated  (Comptroller's  Report,  1859). 

A  more  unequal,  unjust,  and  partial  system  for  taxation  could  not 
well  be  devised  (First  Annual  Report  State  Assessors,  1860,  p.  12). 

The  burdens  are  so  heavy  and  the  inequalities  so  gross  as  almost  to 
paralyze  and  dishearten  the  people  (Assessors'  R.,  1873,  p.  3). 

The  hope  of  obtaining  satisfactory  results  from  the  present  broken, 
shattered,  leaky  laws  is  vain  (Report  of  Com.  of  Taxes  and  Assess- 
ments, 1876,  p.  52). 

The  absolute  inefficiency  of  the  old  and  rickety  statutes  passed  in  a 
by-gone  generation  is  patent  to  all  (Assessors'  Report,  1877,  p.  5). 

The  system  is  a  farce,  sham,  humbug  (Assessors'  Report,  1879, 
p.  23). 

[The  general  property  tax  is]  a  reproach  to  the  state,  an  outrage  upon 
the  people,  a  disgrace  to  the  civilization  of  the  nineteenth  century,  and 
worthy  only  of  an  age  of  mental  and  moral  darkness  and  degradation, 
when  the  "only  equal  rights  were  those  of  the  equal  robber"  (Assessors1 
Report,  1879,  p.  7). 

The  present  result  is  a  travesty  upon  our  taxing  system,  which  aims 
to  be  equal  and  just  (Comptroller's  Report,  1879,  p.  34). 

I  am  still  firmly  of  the  opinion  that  the  attempt  to  reach  personal 
property  in  a  general  property  tax  should  be  abandoned.  This  has  long 
since  been  done  in  practically  every  civilized  community  in  the  world, 
except  the  United  States.  .  .  .  Upon  no  class  in  the  community  does 
the  tax  on  personal  property,  as  now  administered,  bear  more  inequit- 
ably than  upon  the  farmer.  .  .  .  The  tax  upon  personalty  is  therefore 
unjust  as  between  individuals;  unjust  as  between  communities,  and,  as 
experience  has  shown  the  world  over,  it  is  impossible  of  even  approxi- 
mately just  administration.  Then  why  should  it  be  continued?  (The 
Report  for  1898  of  Comptroller  James  A.  Roberts.) 

Political  economists  are  all  but  unanimous  in  insisting  that  an  en- 
lightened system  of  taxation  must  exempt  all  personalty,  and  the  tend- 
ency seems  to  be  to  embody  that  theory  in  law,  as  it  has  already  come 
to  obtain  largely  in  practice  (The  Report  for  1898  of  Superintendent  of 
Banks  Frederick  D.  Kilburn). 


368 


APPENDICES 


MASSACHUSETTS  TOWNS 

Those  who  are  inexperienced  and  rely  blindly  upon  the 
mistaken  theory  that  to  secure  equality  of  taxation  all  kinds 
of  property  must  be  equally  taxed,  frequently  claim  that  the 
fault  is  not  in  the  law  but  in  its  administration.  It  is  gener- 
ally conceded  that  the  state  of  Massachusetts  has  unusually 
able  and  competent  assessors,  and  that  their  work  is  per- 
formed, on  the  whole,  better  than  in  any  other  state  of  the 
Union,  yet  the  proportion  which  the  assessment  of  personal 
property  bears  to  the  assessed  value  of  real  estate  varies 
greatly  throughout  the  state.1  In  some  towns  the  propor- 
tion of  personalty  assessed  is  very  small,  being  less  than  five 
per  cent,  in  1895,  of  the  total  valuation  in  Eevere,  Winthrop, 
Hull,  and  Mashpee.  In  a  few  towns  it  is  less  than  ten  per 
cent,  and  in  a  considerable  number  less  than  fifteen  per  cent 
of  the  total.  These  figures  in  comparison  with  some  other 
Massachusetts  towns  are  remarkable,  for  there  are  eight  towns 
in  which  the  assessed  value  of  personal  property  exceeds  the 
assessed  value  of  realty.  In  Falmouth  the  personalty  is  sixty- 

1  Assessed  value  of  real  and  personal  property  in  eighteen  Massa- 
chusetts cities  and  towns. 


City. 

Real  Estate. 

Personal  Estate. 

Per  cent  of  Per- 
sonal Estate  to 
Total  Valua- 
tion. 

Fall  River 

$41  935  800 

$27  350  696 

39  47 

Lowell    

53,935,960 

15  965  987 

22  84 

26  669  525 

8  214  698 

23  54 

New  Bedford     .... 
Everett  

33,920,700 
13  739  100 

22,360,417 
683  450 

39.73 
4  74 

Chelsea  

20  528  550 

2  384  544 

10  40 

Somerville      

45  224  800 

3  788  250 

7  73 

770  261  700 

211  008  213 

21  51 

67  835  100 

15  914  995 

1901 

Springfield     

48  344  280 

13  071  811 

21  29 

74  953  100 

16  825  172 

1834 

Town. 
Manchester    ..... 

3  067  078 

3  740  536 

5496 

Hopedale   

838  286 

1  108  163 

56  93 

1  850  694 

2  732  017 

59  61 

Milton     

7  620  350 

11  371  089 

59  87 

1,206  605 

1  807  870 

59  97 

2  216  400 

4  284  422 

65  91 

Lincoln  ...... 

797  584 

1  637  335 

67  24 

APPENDICES  369 

five  per  cent  of  the  total,  and  in  Lincoln  sixty-seven  per  cent. 
A  commission  appointed  to  inquire  into  the  expediency  of 
revising  the  tax  laws  of  the  state,  in  their  report  issued  in 
October,  1897,  says:  "  The  taxation  of  personal  property  in 
the  form  of  securities  and  investments  is  thus  a  failure.  It 
is  incomplete,  uncertain,  not  proportional  to  means  as  between 
individuals,  grossly  unequal  in  its  effects  in  different  parts  of 
the  state.  The  experience  of  Massachusetts  in  this  regard  is  the 
same  as  that  of  the  other  states  in  the  Union.  Everywhere, 
without  exception,  the  testimony  is  that  this  part  of  the  sys- 
tem of  the  general  property  tax  is  unequal,  unsuccessful,  often 
demoralizing  to  tax  officers,  always  irritating  to  taxpayers. 

"  The  experience  of  Massachusetts  is  the  more  striking  be- 
cause here  the  difficulty  does  not  lie  mainly  in  the  administra- 
tion of  the  tax  laws.  The  assessors  are  usually  honest,  com- 
petent, zealous.  "We  have  heard  much  of  grave  abuses,  of 
almost  corrupt  laxity,  in  other  states,  but  in  this  Common- 
wealth, notwithstanding  occasional  defections  (some  of  which 
we  have  just  referred  to)  the  standard  of  public  duty  continues 
to  be  high,  and  the  cause  of  failure  is  not  to  be  found  mainly 
in  official  dereliction.  It  lies  in  the  system  itself." 

ILLINOIS  LISTING  SYSTEM 

In  the  state  of  Illinois  the  statutes  require  personal  prop- 
erty to  be  listed  yearly  according  to  the  quantity  owned  on 
the  first  of  May.  Persons  listing  are  required  to  make  state- 
ment under  oath  and  to  deliver  to  the  assessor  an  itemized 
schedule  of  the  number,  amounts,  quantity,  and  quality  of 
all  taxable  personal  property  in  their  possession  or  under  their 
control. 

Eecently  all  attempt  to  obey  the  letter  of  the  law  was 
abandoned  in  Chicago,  and  for  the  tax  upon  personal  prop- 
erty there  has  been  substituted  what  is  practically  a  gross 
revenue  tax  upon  business.  Professor  Commons  has  described 
this  extra-legal  system  in  the  Review  of  Reviews,  February, 
1903: 

"Lists  are  made  out  for  each  line  of  business,  and  are  sent  to  all  the 
taxpayers  appearing  on  the  list.  In  addition,  the  Board  of  Review 
selects  a  committee  of  citizens  from  each  'line,'  and  submits  the  list  to 
them  for  revision.  This  committee,  being  familiar  with  all  the  business 
houses,  rates  them  all  according  to  the  amount  of  business  and  regard- 

24 


370 


APPENDICES 


less  of  the  itemized  schedules  returned  by  each.  At  the  present  time 
there  are  more  than  200  of  these  separate  committees  of  citizens  co- 
operating in  the  assessment  machinery.  The  Board  of  Review  accepts 
their  ratings,  but  at  the  last  assessment  added  10  per  cent  all  around, 
in  order  to  relieve  real  estate  that  much.  This  method  of  citizen  as- 
sessment has  resulted  in  raising  the  valuation  of  personal  property  in 
Chicago  from  $21,000,000  to  $88,000,000.  .  .  Naturally,  in  each  line,  the 
stock  of  goods  is  proportionate  to  the  amount  of  business,  but  it  is 
assessed  as  a  unit  and  no  longer  by  items.  The  law  is  indeed  con- 
formed to  by  publishing  the  items  as  returned  in  the  schedules,  but  the 
additions  made  by  the  Board  are  entered  under  the  item  'all  other 
property/  and  this  item  is  now  two-thirds  of  the  personal  property 
assessment.  One  notable  feature  of  this  practice  is  the  entire  elimina- 
tion of  mortgages  from  the  lists,  and  the  almost  complete  elimination  of 
credits.  While  other  parts  of  the  state  and  other  states  pay  attention 
to  these  items,  the  Chicago  assessors  lump  them  all  together  under  their 
'unit  rule'  of  assessment." 


Name. 

Farm 
Lands. 

Town  and 
City  Lots. 

Total  Real 

Estate. 

Personal. 

Per  cent 
of  Personal 
to  Total. 

Cook  County  .    .    . 
Remainder  of  State 

S14.915.853 
300,002,192 

$282,834,401 
113,089,736 

$297,750,254 
413,091,928 

$88,109,999 
118,983,855 

22.8 
22.3 

Name. 

Watches 
and 
Clocks. 

Carriages 
and 
Wagons. 

Money. 

Credits. 

Cook  County      ...... 

$62,202 
428,021 

1/8 

$236,249 
2,411,653 
1/10 

$2,253,282 
18,875,452 
1/9 

$5,026,746 
21,345,914 

1/5 

Remainder  of  State      .    .    . 
Proportion  in  Cook  County 

Cook  County  has  more  than  1/3  of  the  total  real  estate  value  of  the  state. 

APPENDIX   B 

TAXATION  IN  CHICAGO 

IN  Chicago,  in  1897,  the  Taxpayers'  Defense  League  was 
organized  by  Mr.  Z.  Swift  Holbrook,  in  order  to  cause  the 
assessors  to  reduce  such  assessments  as  were  higher  than  the 


APPENDICES  371 

average,  and  to  raise  those  that  were  lower.  The  circumstances 
in  Chicago  are  peculiar  in  that  it  is  necessary  to  assess  prop- 
erty at  about  one-tenth  of  its  value  in  order  to  keep  the  state 
tax  within  proper  limits.  The  cause  of  this  condition  has  been 
explained  by  Mr.  D.  A.  Wells.  The  constitution  requires  a 
certain  percentage  of  the  assessed  value  of  property  to  be  ap- 
plied to  the  payment  of  an  old  railroad  debt,  and  unless  this 
value  was  kept  down  at  a  very  low  figure,  more  money  would 
be  collected  than  could  be  applied  to  the  designated  purpose. 
But  to  obtain  the  revenue  needed  for  local  purposes  the  rate 
of  taxation  had  to  be  raised,  from  time  to  time,  until  it  came 
to  stand  at  nearly  ten  per  cent  of  the  assessed  valuation  in 
the  business  quarters  of  Chicago. 

It  is  therefore  of  the  utmost  importance  to  a  property 
owner  that  his  assessment  should  be  low;  otherwise  his  tax 
might  exceed  his  income.  Many  assessors,  it  seems,  have 
agreed  with  taxpayers  that  their  assessments  should  be  very 
small,  or  nothing;  and  they  have  also  levied  blackmail  by 
raising,  or  threatening  tp  raise,  assessment  to  confiscatory  fig- 
ures. A  few  of  the  cases  examined  by  the  Taxpayers'  League 
may  be  cited:  A  jewelry  firm  rated  by  Bradstreets  at  over 
$500,000  was  assessed  at  $12,500.  A  corporation  rated  at 
over  a  million  was  not  assessed  on  personal  property  at  all; 
and  one  of  the  greatest  of  corporations  was  assessed  at  $60,000. 
A  man  rated  at  over  half  a  million,  who  has  a  library  worth 
$40,000,  to  say  nothing  of  a  yacht,  and  horses,  carriages,  and 
furniture  to  correspond,  was  rated  at  $200;  while  a  poor 
woman  complained  that,  though  hardly  able  to  afford  a  carpet, 
her  assessment  had  been  raised  from  $200  to  $1,000.  A  large 
manufacturer,  with  a  capital  of  $1,500,000,  beside  a  surplus, 
was  assessed  at  $3,000  on  property  at  the  store,  and  $2,500 
on  that  at  the  factory.  A  great  corporation  was  recently  cap- 
italized in  a  combination  at  $6,500,000,  but  was  assessed  the 
year  following  at  $80,000.  One  of  the  largest  wheat-brokers 
in  the  country,  rated  at  several  millions,  was  assessed  at 
$2,500.  One  of  the  largest  packing-houses  in  the  world  was 
not  assessed  at  all;  one  of  the  great  harvester  companies  at 
$47,100.  A  great  firm  in  the  grocery  business  was  assessed  at 
$50,000,  while  another  of  similar  size  was  assessed  $750,000. 
Agents  from  the  assessors'  office  offered  to  have  this  assessment 
reduced  to  about  $50,000  for  a  bribe  of  $5,000.  Another 
dealer  in  the  same  line,  rated  at  over  $1,000,000,  was  assessed 


372  APPENDICES 

at  $10,000 ;  a  rich  banker,  who  has  spent  $13,000  for  a  rare 
Bible,  and  large  sums  for  art,  was  assessed  at  $400.  One  of 
the  largest  department  stores,  carrying  probably  $2,000,000 
worth  of  stock,  and  making  a  profit  of  $1,000,000,  was 
assessed  at  $45,000;  another,  as  large,  was  assessed  at  $48,- 
000 ;  and  a  third,  rated  at  $500,000,  was  assessed  at  $25,000. 
The  largest  house  in  its  line  of  business,  rated  at  $1,000,000, 
was  assessed  at  $500.  A  brewery,  rated  at  over  $500,000,  was 
assessed  at  $1,500.  A  prominent  concern,  being  informed  that 
its  personal  property  was  not  assessed  at  all,  at  first  denied, 
and  then  defended,  the  omission;  but  rather  than  submit  to 
investigation  consented  to  be  assessed  at  $25,000.  The  list 
might  be  extended  indefinitely,  and  many  persons  known  to  be 
rich  are  not  assessed  at  all.  The  estate  of  one  of  the  richest 
and  most  prominent  merchants  in  Chicago  was  recently  settled, 
and  the  city  has  claimed  several  millions  from  the  estate  as 
taxes  on  property  which  was  not  assessed  while  its  owner  was 
alive.  Four  prominent  banks  appealed  to  the  Taxpayers' 
League  on  finding  that  their  assessment  was  over  fourteen 
per  cent  of  their  combined  capital,  surplus,  and  undivided 
profits,  while  many  other  large  banks  were  assessed  below 
seven  per  cent,  four  below  four  per  cent,  and  two  not  at  all. 

From  1873  to  1893  the  assessment  of  personal  property  in 
the  state  fell  from  $287,000,000  to  $140,000,000,  while  that 
of  real  estate  fell  from  $900,000,000  to  $614,000,000.  In 
Cook  County,  which  includes  Chicago,  the  assessment  of  real 
estate  dropped  from  $228,400,000  to  $210,000,000;  that  of 
personalty  from  $55,000,000  to  $39,880,000.  The  assessment 
of  railroad  property,  however,  has  increased  enormously. 

The  report  of  the  tax  commissioners  of  Ohio,  for  1908,  com- 
menting upon  the  inequalities  in  the  assessment  of  real  estate, 


"  In  Adams  county,  of  931  pieces  of  real  estate  transferred  the  aver- 
age tax  value  is  43.4  per  cent,  of  the  sale  value,  while  191  pieces  are  on 
tax  duplicate  at  11.3  per  cent,  and  121  at  120.7  per  cent,  of  the  real 
value.  In  Brown  county  706  pieces  of  real  estate  are  on  the  tax  dupli- 
cate at  an  average  of  53.3  per  cent,  of  their  sale  value,  such  average 
ranging  from  12.3  per  cent,  to  116.6  per  cent.  In  Monroe  county,  709 
pieces  are  on  the^tax  duplicate  at  an  average  of  36.7  per  cent,  of  their 
sale  value  and  this  average  ranges  from  10.8  per  cent,  to  107.3  per  cent. 
In  Montgomery  county  4,000  pieces  are  on  the  tax  duplicate  at  37.1  per 
cent,  of  their  value  and  this  average  ranges  from  12.2  per  cent,  to  106.9 
per  cent." 


APPENDICES  373 

'APPENDIX   0 

TAXATION  or  LAND 

"  ON  principle,  and  as  a  scientific  economist  views  it,  the 
ownership  of  land  is  a  monopoly  given  by  the  state  for  the 
purpose  of  cultivation,  just  as  the  concession  of  a  railway  is 
a  monopoly  given  for  the  purpose  of  locomotion.  In  both 
cases  a  privileged  opportunity  is  given  by  the  state  which  one 
person  enjoys  and  other  persons  do  not  —  which  is  the  source 
of  profit  and  enjoyment  to  the  possessor,  a  profit  and  an  en- 
joyment from  which  all  others  are  excluded.  As  a  principle 
of  political  philosophy,  no  monopoly  ought  ever  to  be  con- 
ceded by  the  state,  except  upon  the  condition  for  services  to 
be  performed,  and  with  a  right  of  supervision  reserved.  Man- 
kind in  general  have  not  been  philosophers,  but  they  have  in 
most  cases  rudely  recognized  the  most  obvious  truths  of  phi- 
losophy. They  have  done  so  here.  Almost  everywhere  in  the 
world  the  monopoly  of  land  ownership  has  been  burdened  with 
some  conditions;  hardly  anywhere,  if  anywhere,  is  there  a 
separate  ownership  of  land  such  as  we  now  naturally  think  of 
it  (though  historically  the  very  idea  is  recent  and  of  yester- 
day) to  be  found,  except  subject  to  certain  duties,  charged 
with  certain  responsibilities.  In  England  least  of  all  has  it 
ever  been  so.  In  the  middle  ages,  when  the  beginnings  of  our 
real  property  law  were  laid,  the  land  was  subject  to  very  for- 
midable burdens;  it  was  the  basis  and  foundation  of  our 
entire  military  system.  It  paid  the  "army  estimates,"  as 
we  should  now  speak.  Gradually  this  condition  of  the  priv- 
ilege was  evaded  by  the  possessors  of  the  privilege.  The  land 
now  pays  no  more  for  our  army  than  the  funds;  a  long  his- 
tory has  taken  it  from  them.  But  the  same  history  has 
brought  other  duties.  For  nearly  three  centuries  the  land  has 
been  liable  for  the  relief  of  the  poor.  The  owners  of  land 
have  been  burdened  with  that  duty  to  the  nation,  and  all  land 
has  been  inherited  and  bought  subject  to  it  and  with  notice 
of  it.  It  has  also,  in  forms  more  or  less  modified,  been  subject 
to  what  we  have  called  the  mixed  charges,  which  are  partly 
for  the  benefit  of  the  locality  and  partly  for  the  benefit  of 
the  nation,  and,  naturally,  it  was  always  subject  to  improve- 


374  APPENDICES 

ment  charges,  which  were  spent  on  its  improvement,  and  which 
increased  its  rent.  The  owners  of  the  land  must  not  there- 
fore complain  of  bearing  national  burdens;  they  have  always 
borne  national  burdens,  and  the  predecessors  under  whom  they 
claim  took  the  land  on  the  condition  of  bearing  them." 
W.  BAGEHOT,  in  Economist,  8  April,  1871. 

THE  TAXATION  OF  EEAL  ESTATE 

To  understand  the  effect  of  a  tax  upon  real  estate  it  is 
necessary  first  to  explain  the  incidence  of  a  tax  upon  land 
and  of  a  tax  upon  houses  and  other  improvements  upon  land, 
for  the  operation  of  an  ad  valorem  land  tax  is  entirely  different 
from  an  ad  valorem  tax  upon  improvements. 

To  discover  the  effect  of  any  tax  the  rule  already  given  must 
be  applied,  that  price  depends  upon  demand  and  supply.  If 
demand  increases  without  any  increase  in  supply,  price  rises. 
If  supply  increases  without  any  increase  in  demand,  price 
falls.  If  there  is  a  perfect  monopoly  of  an  article  and  a  price 
is  arbitrarily  fixed,  a  certain  quantity  of  the  article  can  be 
sold.  If  price  is  raised,  a  less  quantity  can  be  sold,  and  if  price 
is  reduced  a  larger  quantity  can  be  sold  with  the  same  expendi- 
ture of  effort. 

The  only  way  to  affect  price  is  through  an  increase  or  de- 
crease of  the  demand  or  the  supply. 

If  the  element  of  speculation  in  land  is  entirely  disregarded 
a  tax  upon  land  in  proportion  to  its  value  has  no  effect  upon 
the  demand  for  land  or  upon  the  supply  of  land,  and,  con- 
sequently, such  a  tax  has  no  effect  upon  the  price  of  land  ex- 
pressed in  rent.  Disregarding  speculation,  so  long  as  the  tax 
is  not  more  than  the  entire  sum  which  can  be  obtained  for 
the  use  of  land,  it  makes  no  difference  in  rent  whether  the 
tax  is  high  or  low.  As  such  a  tax  cannot  affect  demand  or 
supply,  and  therefore  does  not  affect  rent,  it  falls  wholly  upon 
the  owner.  If  the  owner  is  not  the  user,  the  tax  gives  him  no 
power  to  increase  the  payment  demanded  for  the  use  of  the 
land,  for  the  tax  has  no  effect  whatever  upon  the  number  of 
persons  who  desire  to  use  it,  and  no  effect  upon  the  supply 
of  land  competing  with  his  own. 

If  the  owner  of  land  is  also  the  user,  a  tax  upon  it, 
whether  high  or  low,  provided  it  is  not  higher  than  its  entire 
value,  gives  no  power  to  the  owner  to  increase  the  price  of  his 


APPENDICES  375 

product.  The  price  of  products  is  limited  by  the  cost  of  pro- 
duction upon  the  least  desirable  site,  and  as  the  least  desir- 
able site  has  no  value,  there  would  be  no  tax  upon  it,  and 
the  cost  of  the  most  expensive  increment  would  not  be  affected 
by  the  tax.  This  statement  is  merely  another  form  of  saying 
that  the  rent  of  land  does  not  affect  prices,  which  is  so  ob- 
vious a  fact  as  not  to  require  proof.  Every  one  knows  that 
where  the  value  of  land  is  greatest  goods  are  cheapest,  cheaper 
in  New  York,  for  instance,  than  in  a  country  village. 

The  usual  illustration  to  explain  this  law  is  taken  from 
agriculture,  but  it  is  equally  true  of  all  industries. 

So  far  the  discussion  has  been  based  upon  the  supposition 
that  there  is  no  speculation  in  land.  As  a  matter  of  fact, 
there  is  speculation,  and  consequently  a  tax  upon  land  affects 
the  market  supply  of  land  and  therefore  affects  the  price  of 
land.  In  the  absence  of  any  tax,  valuable  land  is  held  out 
of  use  at  prices  higher  than  it  is  worth  for  present  use.  When 
the  supply  is  thus  restricted  the  price  of  all  land  for  rent  or 
sale  is  increased.  A  tax  upon  land  in  proportion  to  its  value, 
as  it  is  high  or  low,  more  or  less  forces  into  use  valuable  land 
previously  held  idle  in  expectation  of  a  rise  in  value.  When 
the  market  supply  of  land  is  thus  increased,  the  price  of  all 
land  is  thereby  decreased. 

An  important  feature  of  ad  valorem  land  taxation  is  that, 
when  the  rate  is  uniform,  the  tax  falls  wholly  upon  those  who 
own  the  land  at  the  time  of  the  imposition  of  the  tax.  The 
selling  price  of  land  depends  upon  the  net  revenue  which  can 
be  obtained  from  it,  and  if  the  net  revenue  is  reduced  by  the 
imposition  of  a  tax,  the  selling  price  falls  proportionately. 
iPor  example,  the  gross  revenue  which  can  be  obtained  from 
a  certain  lot  or  farm  is  $1,000.  If  there  is  no  tax  upon  it, 
the  selling  price,  calculated  on  a  basis  of  five  per  cent  would 
be  $20,000.  If  there  is  a  tax  of  $200  a  year,  the  net  revenue 
would  be  only  $800,  and  the  selling  price  would  be  $16,000. 
The  owner  at  the  time  the  tax  is  imposed  would  suffer  a  loss 
of  income  of  $200  a  year,  and  if  he  sold  could  only  obtain  a 
price  based  on  the  reduced  revenue.  The  subsequent  purchaser 
would  only  buy  a  revenue  of  $800  a  year,  and  upon  him  the 
tax  would  be  no  burden. 


376  APPENDICES 


SUMMARY 

When  there  is  no  speculation  in  land  an  ad  valorem  tax 
upon  land  is  paid  entirely  by  the  owners,  and  neither  increases 
the  rent  nor  the  price  of  land. 

When  valuable  land  is  held  idle  or  put  to  an  inferior  use, 
being  held  for  speculation,  an  ad  valorem  tax  upon  it  forces 
some  such  land  into  use,  the  market  supply  is  increased,  the 
tax  is  paid  entirely  by  the  owners,  and  rent  and  price  of  land 
decrease. 

When  an  ad  valorem  tax  upon  land  is  imposed  at  a  uniform 
rate  it  falls  wholly  upon  present  owners,  and  subsequent  pur- 
chasers pay  a  price  reduced  by  the  amount  of  the  tax  capital- 
ized at  the  current  rate  of  interest. 

THE  TAXATION"  OF  IMPROVEMENTS  ON  LAND 

In  considering  the  effect  of  a  tax  upon  improvements  on 
land,  the  principle  already  explained  must  be  constantly  borne 
in  mind,  namely,  that  price  depends  upon  demand  and  supply. 

In  order  to  ascertain  the  effect  of  the  tax,  we  must  discover 
how  it  will  operate  upon  demand  or  supply,  for  in  no  other 
way  can  it  have  any  effect  at  all  upon  the  price  which  can  be 
obtained  for  the  use  of  the  improvements. 

Capitalists  are  always  on  the  watch  for  investments  which 
will  yield  a  safe  and  large  return ;  the  result  is  that  the  returns 
to  capital  tend  to  be  equal  in  all  businesses  in  which  risk  is 
the  same.  The  imposition  of  any  charge  upon  a  business  which 
reduces  the  possible  profit  will  soon  restrict  the  investment  of 
capital  in  that  business,  then  the  profit  will  tend  to  rise  to 
the  rate  which  can  be  obtained  in  other  forms  of  investment 
of  equal  safety  and  convenience.  If  any  existing  charge  is 
removed  from  any  business,  or  if,  for  any  cause,  the  custom- 
ary returns  to  capital  invested  in  that  business  are  increased, 
new  capital  tends  to  seek  investment  in  that  business  until  the 
profit  is  again  reduced  to  the  average  level. 

If  a  tax  is  imposed  upon  buildings  and  other  improvements 
upon  land,  the  investment  of  capital  in  land  improvements  is 
checked  until  the  supply  of  such  improvements  is  reduced  in 
proportion  to  demand  to  such  an  extent  as  to  raise  the  price 
sufficiently  to  yield  the  average  return  to  capital.  If  a  tax 
heretofore  imposed  upon  buildings  and  other  improvements  is 


APPENDICES  377 

removed,  capital  at  once  seeks  this  investment  until  the  sup- 
ply is  so  increased  that  the  return  to  capital  falls  to  the  aver- 
age again. 

This  is  a  statement  of  the  general  rule  applicable  to  the  tax- 
ation of  improvements  upon  land,  but  there  is  another  factor 
to  be  taken  into  account.  We  have  so  far  considered  only  the 
increase  and  decrease  of  supply,  but  the  increase  and  decrease 
of  demand  exerts  an  equal  influence  upon  price  and  an  increase 
or  decrease  of  population  directly  affects  the  demand  for  the 
use  of  land  improvements.  We  have,  therefore,  three  cases  to 
consider:  (a)  The  effect  of  a  tax  upon  improvements  when 
population  is  stationary;  (b)  the  effect  of  a  tax  upon  im- 
provements when  population  is  decreasing;  (c)  the  effect  of  a 
tax  upon  improvements  when  population  is  increasing. 

(a)  When  population  is  stationary.  If  the  conditions  of 
population  remain  the  same,  the  demand  for  the  use  of  land 
improvements  will  be  steady,  and  the  price  which  can  be  ob- 
tained for  their  use  can  be  affected  only  by  an  increase  or 
decrease  of  supply.  If  a  tax  fs  imposed  the  return  to  capital 
will  be  decreased,  but  demand  and  supply  being  for  the  time 
constant,  price  will  not  be  affected.  Houses  in  time  wear  out 
and  other  improvements  decay,  so  that  slowly,  but  surely,  the 
supply  of  improvements  will  diminish  unless  new  ones  are 
made,  but  as  return  to  capital  is  decreased  new  improvements 
will  not  be  made  so  long  as  the  return  to  capital  in  this  invest- 
ment is  below  the  average.  When,  in  the  course  of  time,  the 
supply  has  fallen  to  a  point  sufficiently  low  so  that  more  than 
the  usual  return  to  capital  can  be  derived,  capital  will  again 
seek  this  investment. 

We  see  that  when  population  is  stationary  and  a  tax  is 
imposed  upon  land  improvements,  the  tax  will  be  paid,  in  the 
first  instance,  by  the  owners  of  the  improvements,  then  as  im- 
provements wear  out  the  tax  will  gradually  be  shifted  to  those 
who  hire  the  improvements  until  they  are  obliged  to  pay  the 
entire  amount  of  the  tax. 

(&)  When  population  is  declining.  If  the  decline  in  popu- 
lation is  so  rapid  as  to  keep  pace  with  the  decrease  in  the  sup- 
ply of  the  improvements  due  to  decay,  there  will  be  no  shifting 
of  the  tax  from  the  owners  to  those  who  hire  the  improve- 
ments. As,  proportionately  to  the  demand,  the  supply  will  be 
constantly  increasing,  there  can  be  no  increase  of  price. 

(c)  When  population  is  increasing.    With  an  increase  in 


378  APPENDICES 

population  there  is  a  constant  increase  in  the  demand  for  land 
improvements.  The  tax  checks  the  flow  of  capital  to  this  in- 
vestment until  the  demand  increases  to  that  point  at  which 
the  price  rises  so  as  to  include  the  average  return  to  capital, 
plus  the  tax.  In  this  case  the  tax  may  fall  for  a  very  short 
time  upon  the  owners  of  the  improvements,  but  it  is  certain  to 
be  rapidly  shifted  to  those  who  hire  them  and  continues  to 
rest  upon  the  tenants. 

In  the  United  States,  increasing  population  is  the  rule,  and 
a  stationary  or  declining  population  is  the  exception,  so  that 
in  general  taxes  upon  land  improvements  are  shifted  from  the 
owners  to  those  who  hire  them. 

When  those  who  hire  houses  use  them  as  residences  the  tax 
falls  upon  them  and  can  be  shifted  no  further. 

When  the  tax  falls  upon  improvements  used  for  production, 
it  adds  to  the  cost  of  production  and  is  shifted  to  the  final 
consumers  of  the  goods  produced.  Thus  a  tax  upon  all 
factory  buildings  falls  upon  all  those  who  manufacture  goods, 
and  must  ultimately  be  recovered  from  the  purchasers  of  the 
goods  in  the  same  manner  as  any  other  expense  of  the  business. 

THE  SEAL  ESTATE  TAX 

The  effect  of  a  tax  upon  real  estate  is  the  result  of  two 
opposing  forces.  We  have  seen  that  a  tax  upon  the  value  of 
land  not  only  does  not  increase  its  selling  or  rental  value, 
but  also  tends  to  diminish  the  selling  and  rental  value  by  in- 
ducing the  owners  of  some  unimproved  land  to  improve  or  sell, 
thereby  increasing  the  market  supply  of  land.  We  have  seen 
that  the  tax  upon  buildings  is  generally  paid  by  the  user  of  the 
buildings,  as  such  a  tax  tends  to  check  the  erection  of  new. 
buildings  until  the  supply  of  buildings  is  decreased  in  propor- 
tion to  the  demand  sufficiently  to  enable  building  owners  to 
obtain  the  average  rate  of  interest  upon  their  investment. 

When  real  estate  is  taxed  the  tax  falls  partly  upon  land 
and  partly  upon  improvements.  So  far  as  it  falls  upon  land, 
the  tendency,  as  we  have  seen,  is  to  decrease  the  price  which 
can  be  obtained  for  the  use  of  land,  and  so  far  as  it  falls  upon 
buildings  the  tendency  is  to  increase  the  price  which  can  be 
obtained  for  the  use  of  buildings.  It  is  impossible  to  de- 
termine precisely  what  will  be  the  net  result  of  a  real  estate 
tax  in  any  particular  place,  but  certain  general  rules  may  be 


APPENDICES  379 

laid  down  which  will  be  found  to  be  substantially  correct. 
An  increase  in  the  tax  rate  is  wholly  paid  by  the  owners  of 
the  real  estate,  for  the  effect  of  the  increased  rate  put  upon 
unimproved  land  is  to  induce  the  owners  to  improve  or  sell, 
and  this  effect  counteracts  the  tendency  of  the  increased  tax 
upon  buildings  to  check  their  erection,  and  more  than  counter- 
acts it.  We  have  seen  this  result  in  the  boroughs  of  Man- 
hattan and  the  Bronx,  in  the  City  of  New  York  during  the 
year  of  1899.  The  tax  rate  increased  about  20  per  cent,  and 
the  number  of  new  buildings  was  more  than  double  that  of  the 
previous  year;  and  a  number  of  land  owners  gave  as  their 
reason  for  building  the  fact  that  the  increased  tax  upon  their 
vacant  land  rendered  it  unprofitable  to  hold  it  longer  un- 
improved. It  is  alleged  that  there  was  an  exception  to  this 
general  tendency  toward  reduced  rentals  in  some  crowded  sec- 
tions of  the  city,  inhabited  by  laborers,  who  found  it  ex- 
tremely important  to  be  near  their  work.  It  is  said  that 
rents  were  raised  in  these  quarters,  and  that  landlords  asserted 
that  they  were  obliged  to  raise  the  rentals  because  of  the  in- 
creased tax.  While  this  may  be  true,  it  is  perfectly  obvious 
that  the  landlord  could  have  raised  the  rent  to  the  same  extent 
if  there  had  been  no  increase  in  the  tax  rate  at  all,  so  that  in 
reality  this  apparent  exception  is  not  an  exception. 

During  the  year  1898,  in  the  borough  of  Brooklyn,  there 
was  a  considerable  decrease  in  taxation,  but  there  is  no  evi- 
dence of  any  decrease  in  rentals.  In  fact,  the  evidence  shows 
an  increase  rather  than  a  decrease. 

There  is  no  evidence  that  rentals  are  higher  in  cities  where 
the  tax  rate  is  uniformly  high  than  in  cities  where  the  tax 
rate  is  uniformly  low,  other  conditions  being  the  same. 

Where  population  is  stationary  or  declining  it  is  certain  that 
a  tax  upon  real  estate  is  paid  entirely  by  the  owner  of  the  real 
estate  and  does  not  at  all  increase  rentals.  When  population 
is  increasing  the  effect  of  a  tax  upon  land  appears  to  at  least 
counteract  the  effect  of  a  tax  upon  improvements,  so  that  an 
increase  in  the  tax  rate  does  not  increase  rentals. 

One  effect  of  the  tax  upon  real  estate  is  generally  almost  lost 
sight  of,  and  it  is  one  of  the  most  important.  So  long  as  the 
tax  rate  remains  at  about  the  same  point  the  tax  upon  the 
owners,  who  bought  while  that  rate  prevailed,  is  in  reality  no 
tax  at  all.  The  reason  is  that  the  buyer  of  a  parcel  of  real 
estate  pays  a  sum  determined  by  the  probable  net  return,  and 


380  APPENDICES 

if  the  tax  is  low,  and  the  net  return  high,  the  price  will  be 
high;  if  the  tax  is  high,  the  net  return  will  be  correspond- 
ingly lower  and  the  price  proportionately  affected. 

If  the  tax  rate  increases  after  the  purchase  of  a  parcel  of 
real  estate,  the  increase  falls  wholly  upon  the  owner  at  the 
time  the  increase  takes  place.  If  the  rate  of  taxation  con- 
tinues at  the  increased  rate  and  other  conditions  remain  the 
same  the  owner  will  be  obliged  to  accept  a  smaller  price  from 
a  buyer,  and  the  buyer,  so  long  as  the  rate  does  not  again  in- 
crease, will  practically  pay  no  tax  at  all,  as  his  purchase  price 
will  be  as  much  less  as  the  capitalized  value  of  the  increased 
annual  tax. 

CONCLUSION 

The  general  conclusion  of  the  whole  matter  is  that  taxes 
upon  things  capable  of  reproduction  are  paid  by  the  consumers 
of  the  things  taxed,  and  that  taxes  upon  things  not  capable 
of  reproduction,  but  of  fixed  quantity,  are  paid  by  the  owners 
and  only  by  those  who  are  the  owners  at  the  time  the  tax  is 
imposed.  —  From  The  Burdens  of  Local  Taxation  and  Who 
Bears  Them,  by  Lawson  Purdy. 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  5O  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $I.OO  ON  THE  SEVENTH  DAY 
OVERDUE. 


DEC  16  1933 

REC'D  LD 

'/ 

nri  1  1  W6? 

Uui    1*  l«'ot- 

•*t   13  * 

•^«-< 

JUN    7  M 

**A0"*r 

"&*# 

*      2****1' 

;j 

APR  17  1953  LU 

W'cP&IU. 

R£C  u  LD 

OUi  111962 

'•      r      i  1  1.  rl 

LD  21-100m-7,'33 

YC  23351 


226764 

-305 


